<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 1999

Commission file number 1-13293


                                 SunSource Inc.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           Delaware                                              23-2874736
-------------------------------                          -----------------------
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                               Identification No.)

       3000 One Logan Square
       Philadelphia, Pennsylvania                                 19103
----------------------------------------                     --------------
(Address of principal executive offices)                        (Zip Code)

Registrant's telephone number, including area code:  (215) 282-1290

Securities registered pursuant to Section 12(b) of the Act:

      Title of Class                   Name of Each Exchange on Which Registered
------------------------               -----------------------------------------
       Common Stock,                              New York Stock Exchange
  par value $.01 per share

Preferred Share Purchase Rights                   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

  YES  ___X___       NO ______


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ______

The aggregate market value of the Common Shares held by non-affiliates of the
registrant on March 24, 2000 was $25,117,107. On March 24, 2000 there were
6,854,634 Common Shares outstanding.

Documents Incorporated by Reference: Portions of the Proxy Statement for the
Annual Meeting of Stockholders to be held May 11, 2000 are incorporated by
reference in Part III of this Form 10-K.



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                                     PART I


Item I - Business


General

SunSource Inc., a Delaware corporation (the "Company" or "SunSource"), is one of
the largest providers of value-added services and products to retail and
industrial markets in North America. The Company operates through indirect
wholly-owned subsidiaries in four business segments which are: (1) Technology
Services, operating as SunSource Technology Services Inc. ("STS"); (2) Hardware
Merchandising, operating as The Hillman Group, Inc. ("Hillman"); (3) Expediter,
operating as Kar Products, Inc., and A. & H. Bolt & Nut Company Limited
(collectively, "Kar" or "Kar Products"); (4) Integrated Supply, operating as
SunSource Integrated Services de Mexico, S.A. DE C.V. These operating units
represent businesses within the distribution industry which are characterized by
a potential for value-added services, economies of scale and opportunities for
further consolidation.

In December, 1999, the Company's Board of Directors approved management's plan
to dispose of the Company's Glass Merchandising segment, operating as Harding
Glass, Inc.("Harding"). Accordingly, Harding has been accounted for as a
discontinued operation and its results of operations have been segregated from
results of the Company's continuing operations.

On March 2, 2000, the Company contributed its Kar Products operations to a newly
formed partnership affiliated with Glencoe Capital L.L.C. ("Glencoe"). Glencoe
contributed cash equity to the new partnership in exchange for a 51% controlling
interest with the remaining 49% interest retained by SunSource. The Company
received $105 million in cash proceeds from the transaction through repayment of
assumed debt by the new partnership, G-C Sun Holdings L.P. ("G-C"). The Company
will account for its investment in G-C in accordance with the equity method.

On October 28, 1999, the Company entered into a merger agreement to acquire
Axxess Technologies, Inc.("Axxess"), a Tempe, Arizona, manufacturer and marketer
of key duplication and identification systems through a merger transaction.
Axxess had sales of $82 million in 1999. Its product lines include keys and
related accessories, identification tags and letters, numbers and signs. The
transaction is expected to close on or about March 31, 2000, subject to certain
closing conditions.

Technology Services (STS). Technology Services, with sales of $243 million in
1999 is a leading provider of systems and parts and engineering services for
hydraulic, pneumatic, electronic and related systems to major industrial
concerns, as well as small and medium-size businesses. Technology Services
provides services, including engineering and design of both products and
processes and the assembly and repair of complex systems, which enable its
customers to outsource engineering and other functions which previously were
performed in-house.

Hardware Merchandising (Hillman). Hillman, with sales of $152 million in 1999,
is a leading provider of small hardware items and merchandising services to
retail outlets through a nationwide sales and service organization. Hillman
offers a full range of fasteners, letters, numbers, signs, keys, rope and chain
accessories and many other inexpensive specialty goods, which are "must-have"
items for

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hardware retailers that cannot be managed economically by the retailer's own
employees because of the large number of items and their low prices.

Expediter (Kar Products). Kar Products, with sales of $125 million in 1999,
provides personalized, small parts inventory management services to low volume
customers. Kar Products allows its customers to reduce the expenses of
purchasing, receiving and accounting for parts and materials while maintaining
inventory levels critical to its customers' operations.

Integrated Supply. Integrated Supply, with sales of $36 million in 1999,
provides major industrial manufacturing customers with comprehensive inventory
management services for their maintenance, repair and operating supplies. On
July 1, 1999 the Company sold the assets of Integrated Supply's OEM Fastener
Business. Sales from the OEM Fastener Business aggregated $11 million and $22
million for the six and twelve months ended June 30, 1999, respectively.
Integrated Supply enables its customers to reduce inventory investment and the
associated expenses of purchasing, receiving, disbursing and accounting for
parts and materials.

The Company's current organization including its principal subsidiaries and
affiliates is as follows:

<TABLE>
<CAPTION>
                                                              Principal                           Year Acquired/
                                                              Location                              Organized
                                                              --------                            --------------
<S>                                                                                                    <C>
   SunSource Corporate Group, Inc.                            Philadelphia, PA                         1975

   Technology Services
   - SunSource Technology Services Inc.                       Chicago, IL                         1976-1991 (1)

   Hardware Merchandising
   - The Hillman Group, Inc.                                  Cincinnati, OH                          1982

   Expediter
   - Kar Products, LLC                                        Chicago, IL                             1977
   - A. & H. Bolt & Nut Co. Ltd.                              Windsor, Ontario                        1989

   Integrated Supply
   - SunSource Integrated Services
      de Mexico, S.A. DE C.V.                                 Mexico City, Mexico                     1992

   Glass Merchandising
   - Harding Glass, Inc.                                      Kansas City, MO                         1980
</TABLE>



   (1) Consists of various companies acquired from 1976 through 1991.




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Industry Overview

The Company operates in large, fragmented industries characterized by multiple
channels of supply. These channels of supply are currently experiencing
significant changes driven by the higher quality and widespread availability of
management information systems. With better information, manufacturers,
distributors and customers are all able to track their expenses, investments and
returns on investments more accurately. The distribution industry is driven by
the following trends which are rendering the traditional producer-controlled
channels vulnerable to being replaced by new channels organized around customer
requirements and value-added services:

   (i) Manufacturers are increasing their reliance on distributors in order to
enhance their profitability and improve their returns on capital.

   (ii) Customers are increasing their reliance on value-added distributors as
their contacts with the manufacturers diminish or cease altogether.

  (iii)  Customers are outsourcing non-core functions to high quality service
providers.

   (iv)  Channels of distribution are in the process of consolidation.

    (v)  Managerial skills required for success in industrial distribution are
changing dramatically.

SunSource, through its applications engineers and technical support personnel in
Technology Services, provides customized solutions to complex problems
encountered by its customers. The Company believes that its Technology Services
business differentiates itself from other industrial distributors by providing
superior technical and problem-solving capabilities in addition to an extensive
product offering and broad array of related services, such as engineering design
and integrated supply arrangements. In addition, the Company's Hillman business
focuses on the retail sector, delivering merchandising systems, point-of-sale
displays, product support and sales installation services through its nationwide
field service force.

The industrial distribution industry will be impacted by electronic commerce
changing channels of distribution in the future. It is SunSource's opinion that
distributors will capture the vast majority of industrial supply sales
transacted through the internet as a result of their market and product
knowledge and services, including fulfillment capabilities. A number of new
business-to- business companies forming electronic marketplaces have emerged as
intermediaries in the industrial channel. However, all are dependent on existing
distributors for fulfillment of transactions negotiated through these exchanges.
To survive and prosper in this evolving channel, SunSource believes that the
critical requirements for success among existing distributors will be market
knowledge and value-added services including superior support and fulfillment
capabilities.




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Risk Factors

         Restructuring

In December 1996, the Company announced a three-year restructuring plan to
integrate and consolidate the sales, distribution, finance and administrative
operations of its six domestic Technology Services divisions (hydraulic and
pneumatic distributors that were acquired by the Company between 1976 and 1991;
the "December 1996 Restructuring Plan"). The Company expected the December 1996
Restructuring Plan to result in the elimination of approximately 175 employees
in Technology Services and produce certain net annualized cost savings of
approximately $5.0 million per year upon its completion.

Technology Services experienced a reduction of over $75 million in 1999 revenues
from the prior year level caused by its implementation problems with its
integration plan resulting in a loss of $12.5 million in 1999 from earnings
before interest, taxes, depreciation and amortization and non-recurring charges.

In June 1999, as a result of existing business conditions in Technology
Services, the Company announced additional steps to further reduce STS'
workforce by 100 employees, reduce inventories and implement corrective actions
(the "June Restructuring 1999 Plan").

The restructuring activities have resulted in consolidation of the sales
organizations, finance, information systems, distribution networks and
administrative responsibilities for the Technology Services divisions.

The failure to successfully integrate the Technology Services divisions would
have an adverse impact on the Company's ability to restore profitability in STS
and fully achieve the net cost savings from the restructuring plans. There can
be no assurance that the Company's restructuring plans will be successful or
that profitability in STS will be restored to historical levels.

         Changing Industry Environment

The industrial distribution industry is undergoing significant change.
Historically, industrial distributors have served as suppliers of industrial
products and as extensions of manufacturers' sales forces, selling products
through the distribution channels to original equipment manufacturers,
retailers, end users and other customers. In recent years, both manufacturers
and customers have been increasingly reliant on suppliers such as the Company to
reduce purchasing costs and provide a broad range of value-added services,
including inventory management programs, integrated supply arrangements,
electronic ordering capabilities, engineering design and technical support
services. In addition, customers' desire to consolidate their supplier
relationships has required the suppliers to achieve purchasing efficiencies,
expand their geographic coverage and increase product and service offerings
through acquisitions of other distributors. These changes in the industrial
distribution business are causing the industry to become more competitive. There
can be no assurance that the Company will be able to compete effectively in or
adapt to the changing industry environment.




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         Risks Associated with Acquisitions

An element of the Company's future growth strategy is to pursue selected
acquisitions that either expand or complement its businesses in new or existing
markets. However, there can be no assurance that the Company will be able to
identify or acquire acceptable acquisition candidates on terms favorable to the
Company and in a timely manner to the extent necessary to fulfill the Company's
growth strategy. Future acquisitions may be financed through the issuance of
Common Shares, which may be dilutive to the Company's stockholders, or through
the incurrence of additional indebtedness. Furthermore, there can be no
assurance that competition for acquisition candidates will not escalate, thereby
increasing the costs of acquisitions. The process of integrating acquired
businesses into the Company's operations may result in unforeseen difficulties
and may require a disproportionate amount of resources and management's
attention, and there can be no assurance that the Company will be able to
successfully integrate acquired businesses into its operations. The failure to
complete or successfully integrate prospective acquisitions may have an adverse
impact on the Company's growth strategy.

The Company is currently a party to a merger agreement to acquire Axxess, a
manufacturer and marketer of key duplication and identification systems. The
Company is also pursuing discussions with a number of other prospective sellers
of businesses.

         Competition

The distribution industry is highly competitive, with the principal methods of
competition being price, quality of service, quality of products, product
availability, credit terms and the provision of value-added services, such as
engineering design, integrated supply and inventory management. The Company
encounters competition from a large number of regional and local distributors
and from several national distributors, some of which have greater financial
resources than the Company and offer a greater variety of products.

         Seasonality and Industry Cycles

The Company has in the past experienced seasonal fluctuations in sales and
operating results from quarter to quarter. Typically, the first calendar quarter
is the weakest due to the effect of weather on construction activity which
produces a slowdown of sales of material and equipment in the construction
market. Fluctuations in the Company's quarterly operating results could result
in significant volatility in, and otherwise adversely affect, the market price
of the Common Shares.

Some of the principal markets for the products and services offered by the
Company are subject to cyclical fluctuations that generally affect demand for
industrial, commercial and consumer durable goods. Cyclical fluctuations can
affect a number of factors such as pricing, availability and demand for the
Company's products, growth rates in the markets served by the Company's
customers, the delivery and performance of vendors, and the availability of
suitable acquisition candidates. Changes in general economic conditions could
have a material adverse effect on the Company's business, results of operations
and financial condition.


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         Dependence on Information Systems

The Company believes that its proprietary computer software programs are an
integral part of its business and growth strategies. The Company depends on its
information systems generally to process orders, to manage inventory and
accounts receivable collections, to purchase, sell and ship products efficiently
and on a timely basis, to maintain cost-effective operations and to provide
superior service to its customers. There can be no assurance that the
precautions which the Company has taken against certain events that could
disrupt the operations of its information systems will prevent the occurrence of
such a disruption. Any such disruption could have a material adverse effect on
the Company's business and results of operations.

         New York Stock Exchange Listing

In December 1999, SunSource Inc. was notified that the New York Stock Exchange
("NYSE" or the "Exchange") was reviewing the continued listing of the Company's
common stock on the Exchange in connection with the amendments adopted by the
Exchange relating to continued listing criteria. The new standards require not
less than $50 million in total market capitalization and not less than $50
million in stockholders' equity.

The Company developed business plans for the fiscal years 2000 and 2001 which
were presented to and reviewed by the NYSE in January 2000. The NYSE accepted
the Company's business plans which are expected to restore compliance with the
Exchange's new continued listing standards within 18 months.

While the Company will undertake to maintain its NYSE listing, there can be no
assurance that the Company will be successful in implementing the business plans
submitted to the Exchange and achieve compliance with the required listing
standards or that the NYSE will continue to list the Company's common stock on
the Exchange.

Segment Information

Refer to Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 21 of Notes to Consolidated Financial
Statements for Segment financial data for the three years ended December 31,
1999.

Technology Services

SunSource Technology Services, Inc., with sales of approximately $243 million in
1999, offers a full range of technology-based products and services to its
customers. Its product lines include hydraulic, pneumatic, electronic and
filtration parts and equipment. Services include engineering design, equipment
repair, product upgrades, and assembly of subsystems.

STS seeks to build strong relationships with its customers by providing
technological/problem-solving capabilities along with quality products.
Technology Services relies on its engineering and fabricating capabilities to
provide customized solutions for specific applications requiring product
engineering, assembly or fabrication. To help a customer better understand how
it

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is performing relative to industry best practices, STS can perform a technology
review of the customer's facilities covering areas such as electronic systems,
hydraulics, pneumatics, repair activities and inventory management. Technology
Services can demonstrate to its customers those areas in which they meet
industry best practices and, when they do not, offer detailed, cost-efficient
steps to improve their performance to meet those standards. The Technology Group
also conducts multiple-day training programs to help customers stay current with
evolving technologies relevant to their operations.

Technology Services has benefitted from the trend for manufacturers to move
toward increased standardization of products. The result is that many such
products have to be modified and used in combination with other components in
order to meet customers' performance requirements. STS recognized this trend as
an opportunity to set up a formal system to customize standardized products to
meet the more specialized needs of its customers. Management believes that there
is a growing market for such customized solutions among medium and smaller
original equipment manufacturers ("OEM") who do not have the capabilities to
develop such products.

Technology Services has 23 repair centers throughout the United States to
provide customers with convenient and reliable sources for the repair of
worn-out hydraulic power equipment. Repair centers have been useful in gaining
market share as they have helped STS achieve an expanded relationship with many
of its customers. They also provide Technology Services with an opportunity to
win new customers because many of the local distributors do not have the
resources to provide comparable repair services. STS plans to continue its
successful program of establishing service centers for the repair and overhaul
of hydraulic equipment in major industrial markets around the country.

The six distribution companies which today comprise Technology Services were
acquired by the Company between 1976 and 1991. The acquired companies typically
enjoyed profitable market niches created either through exclusive territories
granted by their vendors or the unique services they offered. Until recently,
STS operated each of its divisions on a decentralized basis with each division
having its own president and vice president of sales. In December 1996, the
Company announced a three-year restructuring plan to integrate and consolidate
the six domestic Technology Services divisions. The integration of the sales
organization, finance, information systems and administrative functions of
Technology Services was completed in 1999. Consolidation of the distribution
network was completed in the first quarter of 2000.

With the completion of restructuring of the sales organization in 1999, the
sales force is now focused on account management and expanded customer
relationships in a defined geography. The outside sales representatives are also
supported by technical product specialists to assist in the delivery and
application of product.

Technology Services completed in the first quarter of 2000 the consolidation of
36 inventory stocking locations into six principal distribution centers which
the Company believes will result in significantly lower operating costs and
better product availability. Centralized purchasing and inventory management is
expected to result in improved fill rates for customers while at the same time
reducing STS' inventory investment, leveraging its purchasing power with many
suppliers and reducing suppliers' operating costs.

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         Products and Suppliers. Technology Services believes that it carries
the most diverse selection of fluid power and related technical products of any
distributor in the United States, totaling an estimated 35,000 items in four
major product categories, as follows: hydraulics, pneumatics, electronics and
filtration. Typically, hydraulic systems are employed for dealing with heavy
loads in applications such as mining, manufacturing, construction or
agriculture. An example of a hydraulic application is the system that controls
the positioning of the scraping blade of a road grader--an integrated system of
motors, pumps, valves, tubing, sensors and electronic controls. Pneumatic
systems are similar to hydraulic systems except that air or some other gas is
substituted for hydraulic fluid. Pneumatic systems are preferred for lighter
weight applications such as light manufacturing and packaging lines.

STS has a broad supply base which includes most major manufacturers of fluid
power and related technical products in the United States. Technology Services'
top five suppliers account for approximately 30% of its 1999 purchases. Because
of the fragmented nature of the industry, manufacturers of this type of
equipment historically have awarded their franchises on a limited geographical
basis. One of Technology Services' larger suppliers is Sauer-Sunstrand, whose
products are distributed in most of Technology Services' territories.

In 1999, Technology Services has lost certain vendor relationships in limited
geographic regions which for the most part have been replaced with other vendor
product lines. In recent years there has been considerable consolidation among
suppliers, a trend which management believes will continue and benefit
Technology Services. In addition, Technology Services seeks to provide valuable
market and product information that enhances its relationships with its key
suppliers by helping them improve their product offering in response to changing
market demands.

         Markets and Customers. Technology Services currently serves over 25,000
customers, the top five of which accounted for approximately 10% of its 1999
sales. Approximately 50% of sales are to OEM customers who incorporate the
equipment or systems purchased into their final products. The remaining 50% of
sales are primarily to maintenance, repair and operation ("MRO") customers.

Within the MRO and OEM markets, Technology Services sells to construction
equipment manufacturers, industrial wholesale distributors, metalworking
equipment manufacturers, farm and garden equipment manufacturers, industrial
specialized machinery manufacturers and automobile and auto parts manufacturers.

         Sales and Marketing. STS markets its products nationwide, principally
through a network of outside account managers supported by application
engineers, customer service representatives and a telemarketing operation
("SunSource Direct"). In order to become more responsive to the increasing
demands of customers, Technology Services has devoted substantial resources to
make its sales force more specialized both in terms of technical training and
industry knowledge.

The STS group employs approximately 230 outside sales representatives. Each
customer has a primary sales representative who might be assisted by technology
specialists or industry specialists. Technology specialists are available in the
fields of hydraulics, pneumatics, mobile equipment, lubrication, filtration,
automation and other specialties while industry specialists bring particular
expertise in industries such as pulp and paper, construction equipment,
injection molding or heavy metal working. STS is in the process of adding
additional industry specialists to its sales organization.

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To support the outside sales representatives, Technology Services employs
approximately 170 customer service representatives who collectively function to
take orders from customers on the telephone, answer questions and solve
problems. STS also employs approximately 25 people in its SunSource Direct
operation which is responsible for customers with sales potential not large
enough to justify the cost of service by an outside sales representative. In
addition, an electronic data interchange ("EDI") capability has been established
for use with selected customers and vendors and the group is in the early stages
of designing a presence on the Internet.

         Competition. The great majority of Technology Services' competitors are
relatively small companies with sales of less than $20 million from one or two
facilities. Many of these companies offer considerable depth in certain product
lines, together with related technical support. Technology Services competes
with these companies on price, the strength of its product offering and an
extensive range of ancillary technical services. The largest national competitor
is Motion Industries which competes on the basis of price and product
availability. Another national competitor is Sophus Berendsen.


The Hillman Group

The Company believes that The Hillman Group, Inc., with sales of $152 million in
1999, is the leading supplier of merchandising services, fasteners and related
small hardware repair items to retail outlets in the United States. Through its
sales and service force, Hillman provides hardware retailers in all 50 states
and in Mexico, Central and South America with an extensive line of fasteners and
related hardware items. More importantly, Hillman complements its extensive
product selection with value-added services for the retailer.

Fasteners and related hardware items typically account for approximately 25% of
a hardware store's traffic, but less than 5% of its revenues. A typical hardware
store maintains in inventory thousands of different items, many of which
generate small dollar sales but large profits. It is difficult for a retailer to
monitor economically all stock levels and to reorder the products from multiple
vendors. The problem is compounded by the necessity of receiving small shipments
of inventory at different times and having to stock the goods. However, failure
to have these small items consistently available will have an adverse effect on
store traffic, thereby denying the retailer the opportunity to sell items that
generate higher dollar sales.

Hillman's service representatives regularly visit retail outlets to review stock
levels and to reorder those items in need of replacement. Thousands of items can
thus be actively managed with the retailer experiencing a substantial reduction
in paperwork and labor costs. Service representatives also assist in organizing
the products in a user-friendly manner. Hillman complements its broad range of
products with value-added merchandising services such as displays, product
identification stickers, retail price stickers, store rack and drawer systems,
assistance in rack positioning and store layout and inventory and restocking
services. Periodically Hillman introduces new package designs and color-coding
for ease of shopping by hardware store customers, and also modifies rack designs
to improve attractiveness of individual store displays. Furthermore, Hillman

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provides the retailer with inventory management software that ties to the
retailer's point-of-sale system. In effect, the Hillman Group functions as a
merchandising manager for hardware retailers. Hillman supports these services
with high order fill rates and rapid delivery from its eight distribution
centers across the United States. Orders are normally shipped within 48 hours
with a 96% order fill rate.

         Products and Suppliers. The Hillman Group buys its products from
approximately 500 vendors, the largest of which accounted for 10% of Hillman's
1999 purchases and the top ten of which accounted for less than 50% of its 1999
total purchases. About half of its purchases are from overseas suppliers, with
the balance from domestic manufacturers and master distributors. Hillman's
product line includes both standard and specialty nuts, bolts, washers, screws
and anchors. The line also includes brass, plastic, stainless steel, and other
miscellaneous fasteners. The depth of the line, over 35,000 products, is
believed to be the largest in today's industry. Non-fastener products feature a
complete line of picture hanging items and accessories, keys, letters, numbers,
signs, rope and chain accessories, and an extensive list of specialty items with
fuses, electrical connectors and small bulbs heading the list.

To assure quality from its vendors, the Hillman Group conducts annual on-site
evaluations and random sampling of products and communicates the results to
vendors. Hillman also tracks the performance of its vendors based on delivery
time and accuracy of shipments.

         Markets and Customers. Hillman services approximately 9,100 full
service retail outlets and historically has serviced individual dealers of the
larger cooperatives, such as Tru-Serv, Ace and Do it Best. The Hillman Group
sells directly to the cooperative's retail locations and also supplies many
fastener items to the cooperative's central warehouses. These central warehouses
continue to distribute to their smaller members that do not have the purchase
volume to justify direct service from Hillman. These arrangements with the
cooperatives reduce credit risk and logistic expense for Hillman and reduce
central warehouse inventory and delivery costs for the cooperatives.

The Hillman Group is also increasing its focus on regional and national lumber
yards and home centers, particularly companies with three to fifteen locations.
Management believes that the dynamics which make its services attractive to
hardware retailers are present with these larger customers as well. At the
present time, Hillman sells approximately $17 million to this market segment.
Management has established a special sales and service force to further
penetrate this market segment.

Hillman also sells to approximately 5,000 smaller hardware outlets and over
6,000 non-hardware accounts that are not large enough to qualify for Hillman's
full service program, through its Tele-Source division. In the later part of
1998 and 1999, Hillman began selling to the "Big Box" home centers such as Home
Depot as well as capturing some "Farm and Fleet" business. New business is also
being cultivated internationally in such places as Mexico, South and Central
America, and the Caribbean.




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         Sales and Marketing. The Hillman Group has always been able to be more
responsive to customers' needs than its competitors because they employ the
largest direct national sales and service organization in the industry.
Hillman's sales force consists of over 220 people, managed by 23 field managers.
Each sales representative is responsible for approximately 50 full service
accounts that they call on every two weeks on average. The service organization
consists of 120 full-time and 10 part-time people, managed by 15 field managers.
The National Accounts group focuses on "Big Box" retailers, large national
chains and grocery stores. In addition, the sales force is supported by
Hillman's Inside Sales and Customer Service group that is responsible for the
expediting of orders, quoting special items and issuing credits. Coupled with
the efforts of the Marketing Department, the sales force not only sells
products, but can sell merchandising and technological support capabilities as
well. The Marketing Department provides support through the development of new
products, sales collateral, promotional items, merchandising aids and marketing
services such as advertising and trade show management. Its EDI system is used
by a number of its large customers.

         Competition. The principal competitors for Hillman's core business are
Midwest Fasteners, Serv-A-lite, Elco and Sharon Bolt & Screw. The latter two
carry mainly fastener products. Hillman competes primarily on the strength of
the merchandising services it provides, as well as product availability, price
and breadth of product line. Management estimates that Hillman sells to
approximately 65% of the full service retail outlets that comprise its core
market. The smaller hardware outlets who purchase products but not services from
Hillman also purchase products from local and regional distributors and
cooperatives. Competition in this segment is primarily on the basis of price and
availability.

The primary competitors in the home center, regional and national lumberyard
markets are Crown-Bolt with an estimated 50% market share and Elco and the
Newell Group. Hillman estimates its share in this market to be less than 10%.
Competition is based primarily on in-store service and price. Other competitors
are local and regional distributors.

Kar Products

Kar Products, Inc., with sales of $125 million in 1999, offers personalized,
small parts inventory management service to the low volume customer (small and
medium-size accounts). The Kar sales force relieves the customer of the
inconvenience and expense of purchasing numerous, small, inexpensive maintenance
parts and provides assurance against the expense and inconvenience of stock
outs. Sales in this market segment tend to be of relatively small dollar value
items with limited technology content but high service demands. The Company
believes that the Kar business has a competitive advantage in this market
segment due to its large sales force, a broad inventory of parts for diverse
applications, a reputation for high-quality products, a responsive physical
distribution system and a computerized material management system which permits
98% of all orders to be shipped within 24 hours. In 1999, Kar sold more than
40,000 products to over 50,000 customers in the United States and Canada.

         Products and Suppliers. Kar packages and inventories over 40,000 items
in nine major product categories. The largest category is fasteners, which
accounted for approximately 30% of 1999 Kar sales. Parts are purchased from over
700 regular vendors, none of which account for greater than 10% of its annual

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purchases. This segment has long-standing relationships with a majority of its
suppliers and continually seeks to upgrade vendor performance by measuring it
and educating vendors on Kar's quality and service standards. A majority of the
products sold by Kar are packaged by vendors under the private brand labels of
Kar Products, Inc. and A&H Bolt and Nut Co. (as "The Fastener Centre").

To maintain its reputation for leading product lines and "one-stop shopping,"
Kar emphasizes new product innovation and is an active participant in trade
shows and trade publications. Kar works with its vendors to introduce more than
500 new products per year.

         Markets and Customers. Customers of Kar tend to be smaller companies
that make frequent small purchases. A typical expediter customer purchases less
than $10,000 per year from this segment and includes truck fleet operators,
construction and mining operations, industrial plants, paper plants, welding
shops, hospitals, schools, government facilities and automobile dealerships.

         Sales and Marketing. The Kar sales representatives serve their
customers by providing merchandising systems, helping control inventory and
physically stocking and organizing products. Items typically include nuts,
bolts, small cutting tools, lubricants and related items. The service provided
to the customer is to insure that all of these small consumables remain in
stock, thereby enabling the customer to avoid the expense of maintaining
inventories, placing purchase orders and receiving materials. Even more
importantly, the customer's highly trained technicians do not have to waste time
and money tracking down missing parts of nominal dollar value. Larger accounts
are offered programmed inventory maintenance service ("PIMS") to ensure that
inventory is maintained at appropriate levels. PIMS sales account for
approximately 40% of total Kar sales. Kar also offers customized product
literature which is targeted to selected niche markets.

The Kar sales force consists of approximately 700 sales representatives, each of
whom sells the entire product line and serves an average of 70 customer
accounts. Ten to twelve sales representatives in a geographical area report to a
district manager, who in turn reports to one of ten regional vice presidents.
Sales management support includes training on new product applications and
technical information to assist customers in solving operational and maintenance
problems. The marketing department provides support in the form of product line
management, promotional programs, catalogs and related materials. Logistics
support is provided by nine strategically located distribution centers and a
computerized material management system which assures fast, accurate and
complete shipments.

         Competition. Kar competes primarily with other national expediters that
provide a similarly high level of service, and to a lesser extent with more
narrowly focused regional or small local distributors competing mainly on the
basis of low price with minimal service. The four largest national expediters
are Premier Industrial, Bowman Products, Curtis Industries and Lawson Products,
none of which has a significant market share. Kar's business serves all segments
of the highly fragmented MRO market and has less than 1% market share. The
Company believes that Kar Products can capture additional market share by
increasing the number of its qualified sales representatives and has a program
in place to improve the quality and training of its sales representatives.



                                       13

<PAGE>



Integrated Supply

The Integrated Supply segment, with sales of $36 million in 1999, is focused on
major industrial manufacturing customers. In some instances, Integrated Supply
will take over complete responsibility for a customer's purchases of
maintenance, repair and operating supplies. In those cases, Integrated Supply
places the purchase orders, receives the material and dispenses it to the
customer's employees from the customer's tool cribs. The advantage to the
customer is substantial reduction in the total cost of procuring and handling
the thousands of items which are routinely used by a large facility, while at
the same time improving the availability of these materials.

         Products and Suppliers. The products and suppliers used by the
Integrated Supply segment vary considerably depending on the nature of the
customer's manufacturing activity. Integrated Supply seeks to maximize its
purchasing power by aggregating purchases of common items used by multiple
customers and also by purchasing through the other SunSource businesses.
Integrated Supply often obtains lower prices and provides improved availability
for many products without changing the customer's vendors.

         Markets and Customers. Integrated Supply customers tend to be large
industrial facilities which purchase in excess of $1 million per year from this
segment. Integrated Supply's major industrial customers include Mercedes Benz,
Colgate and Dirona.

         Sales and Marketing. Integrated Supply approaches its larger integrated
supply customers by offering to perform a survey of their existing procurement
practices. The goal of the study is to determine whether the customer's total
costs can be reduced by utilizing the outsourcing services offered by Integrated
Supply. Typically, savings occur in the customer's purchasing department, in its
tool cribs or other dispensing locations within its facility and in lower
inventory carrying costs. The net result of a decision to outsource to
Integrated Supply is typically lower total costs, substantial reduction in
inventory investment and improved product availability.

         Competition. The competition for the Integrated Supply comes from a
large number of companies following a variety of strategies. Some competitors
seek to be perceived as an integrated supplier by continually increasing the
number of product lines offered. Other competitors provide staff to dispense
product in a customer's plant. The Company's Integrated Supply segment also
competes with "strategic alliances" among established distributors of
traditional product lines.

Insurance Arrangements

Under the Company's current insurance programs, commercial umbrella coverage is
obtained for catastrophic exposure and aggregate losses in excess of expected
claims. Since October 1991, the Company has retained the exposure on certain
expected losses related to worker's compensation, general liability and
automobile. The Company also retains the exposure on expected losses related to
health benefits of certain employees. The Company believes that its present
insurance is adequate for its businesses. See Note 17 of Notes to Consolidated
Financial Statements of the Company as of and for the three years ended December
31, 1999.

                                       14

<PAGE>



Employees

As of December 31, 1999, the Company's total operations employed approximately
4,010 employees, of which approximately 1,780 were sales personnel,
approximately 1,430 were employed as warehouse and delivery personnel, and
approximately 800 held administrative positions. The Company's total operations
have collective bargaining agreements with five unions representing a total of
approximately 78 employees. In the opinion of management, employee relations are
good.

Backlog

The Company's sales backlog for continuing operations was $50.1 million as of
December 31, 1999, and $60.0 million as of December 31, 1998.

Item 2 - Properties.

The Company currently has approximately 164 warehouse and stocking facilities
located throughout the United States, Canada and Mexico. Most of these include
sales offices. Approximately 21 of these facilities are owned and the remainder
are leased. The Company's principal properties are owned or leased warehouse
facilities, as follows:

   Division                    Location                    Description
   --------                    --------                    -----------

   Hillman                    Cincinnati, Ohio            250,000 sq.ft.(leased)
   Harding                    Denver, Colorado            184,000 sq.ft.(owned)
   Technology Services        Addison, Illinois           153,000 sq.ft.(leased)
   Kar                        Itasca, Illinois             80,000 sq.ft.(leased)

In the opinion of management, the Company's existing facilities are in good
condition.

Item 3 - Legal Proceedings.

Litigation originally instituted on February 27, 1996 is pending in the Court of
Common Pleas of Montgomery County, Pennsylvania in which Dorman Products of
America, Ltd. ("Dorman"), and its parent, R&B, Inc. ("R&B"), allege that
misrepresentations of certain facts were made by the Company, upon which R&B
allegedly based its offer to purchase the assets of the Company's Dorman
Products division. Dorman and R&B seek damages of approximately $21.0 million.
In the opinion of management, the ultimate resolution of this matter will not
have a material effect on the consolidated financial position, operations or
cash flows of the Company.

Item 4 - Submission of Matters to a Vote of Security Holders.

Not applicable.









                                       15

<PAGE>



Executive Officers of the Company

The following table sets forth certain information regarding the Company's
executive officers:

<TABLE>
<CAPTION>
Name                                Age     Position
----                                ---     --------

<S>                                 <C>     <C>
Donald T. Marshall                  66      Chairman of the Board of Directors, SunSource Inc.

Maurice P. Andrien, Jr.             58      President and Chief Executive Officer, SunSource
                                            Inc.

John P. McDonnell                   65      Retired as Chief Executive Officer, SunSource
                                            Industrial Services Company, Inc. on December 31,
                                            1999

Joseph M. Corvino                   45      Vice President - Finance; Chief Financial Officer;
                                            Treasurer and Secretary, SunSource Inc.

Max W. Hillman, Jr.                 53      Chief Executive Officer, The Hillman Group, Inc.

Harold J. Cornelius                 51      Chief Executive Officer, Harding Glass, Inc.
</TABLE>



All executive officers are currently elected for a one-year term by the Board of
Directors. There are no family relationships between any of the Company's
executive officers and directors.

The following is a summary of the business experience of the executive officers
listed above during at least the last five years. Periods prior to the
Conversion on September 30, 1997 relate to the Company's predecessor, SunSource
L.P. (the "Partnership").

Donald T. Marshall has been the Chairman since April, 1999.  Mr. Marshall served
as Chairman and Chief Executive Officer from December 1988 to April 1999.

Maurice P. Andrien, Jr. has been President and Chief Executive Officer since
April, 1999. Mr. Andrien served as President and Chief Operating Officer of
Unican Security Systems, Ltd. from June 1998 to April 1999. Mr. Andrien served
as Chief Executive Officer of Curtis Industries, Inc. from April 1992 to May
1998.

John P. McDonnell has been Chief Executive Officer of SunSource Industrial
Services Company, Inc. from December 1996 to December, 1999. Mr. McDonnell
served as President and Chief Operating Officer of the Company from December
1994 to April 1999. Mr. McDonnell served as Group Vice President from December
1987 to December 1994.

Joseph M. Corvino has been Vice President-Finance, Chief Financial Officer,
Treasurer and Secretary since December 1995. Mr. Corvino served as Vice
President and Controller from May 1993 to December 1995 and as Controller from
December 1985 to May 1993.

Max W. Hillman, Jr. has been the Chief Executive Officer of The Hillman Group,
Inc., since December 1996.  Mr. Hillman served as Group Vice President from
December 1991 to December 1996.

Harold J. Cornelius has been the Chief Executive Officer of Harding Glass, Inc.,
since March 1995. Mr. Cornelius served as Group Vice President from December
1988 to December 1996.

                                       16

<PAGE>



                                     PART II


Item 5 - Market for Registrant's Common Shares and
         Related Stockholder Matters



Market Prices
As a result of the Company's September 30, 1997 conversion from partnership to
corporate form (the "Conversion"), the Common Shares began trading on the New
York Stock Exchange on October 1, 1997, under the symbol "SDP". The following
table sets forth the high and low closing sale prices on the New York Stock
Exchange composite tape for the Common Shares:

         1999                                HIGH                      LOW
         ----                               ------                   -----
         First Quarter                     $18.9375                  $13.8750
         Second Quarter                     16.3125                   12.6875
         Third Quarter                      11.0000                    4.8750
         Fourth Quarter                      7.2500                    3.5000
         1998
         First Quarter                     $29.5000                  $23.3125
         Second Quarter                     29.3750                   21.7500
         Third Quarter                      21.7500                   15.0000
         Fourth Quarter                     21.5625                   14.0000

As of March 24, 2000 there were approximately 492 holders of record of the
Common Shares. The total number of Common Shares outstanding as of March 24,
2000 was 6,854,634.

NYSE Listing Requirements
In December 1999, SunSource Inc. was notified that the New York Stock Exchange
("NYSE" or the "Exchange") was reviewing the continued listing of the Company's
common stock on the Exchange in connection with the amendments adopted by the
NYSE relating to continued listing criteria. The new standards require not less
than $50 million in total market capitalization and not less than $50 million in
stockholders' equity. The Company developed business plans for the fiscal years
2000 and 2001, which were presented to and reviewed by the Exchange in January
2000. The NYSE accepted the Company's business plans which are expected to
restore compliance with the Exchange's new continued listing standards within 18
months.

Dividends
On June 30, 1999, the Board of Directors of the Company suspended indefinitely
the quarterly cash dividend of $0.10 per Common Share.

Stock Repurchase
On August 6, 1998, the Company's Board of Directors authorized $15.0 million for
management to repurchase up to 10% of the Company's outstanding common shares
through open market transactions and private block trades dependent upon market
conditions. The Company subsequently suspended the repurchase program on March
16, 1999. The Company has acquired and placed into treasury 479,100 common
shares through December 31, 1999, at an average cost of $18.12 per common share.

Offering
On March 25, 1998 the Company closed an offering of its Common Shares (the
"Offering"). The Company issued and sold 500,000 Common Shares in addition to
Common Shares sold by certain selling stockholders in the Offering. The
underwriters in the Offering exercised their option to purchase 296,408
additional Common Shares of the Company to cover over-allotments on March 27,
1998.



                                       17

<PAGE>



Item 6 - Selected Financial Data.

         The following table sets forth selected consolidated financial data of
         the Company and the predecessor Partnership as of and for the five
         years ended December 31, 1999. Data for all periods shown are derived
         from financial statements of the Company and the Partnership which have
         been audited by PricewaterhouseCoopers LLP, independent accountants, as
         indicated in their reports thereon. See accompanying Notes to
         Consolidated Financial Statements and "Management's Discussion and
         Analysis of Financial Condition and Results of Operations" for
         information regarding the Conversion and Refinancing as well as
         acquisitions and divestitures that affect comparability.
<TABLE>
<CAPTION>
                  (dollars in thousands, except for partnership interest and share data)


Income Statement Data for Years
Ended December 31:                                    1999          1998           1997           1996           1995
                                                    --------      --------       --------       --------       ------

Continuing Operations
<S>                                                 <C>            <C>            <C>           <C>            <C>
  Net sales                                         $555,652       $617,518       $606,449      $558,885       $537,374
  Gross profit                                       227,123        253,182        244,637       225,489        218,503
  Income (loss)                                      (11,114)        11,857         30,842        16,260         21,016
Gain on sale of division                                  --             --             --            --         20,644
Income (loss) from discontinued
 Harding segment                                     (26,022)         1,960          1,690         3,007          3,085
Extraordinary loss                                      (235)            --         (3,392)           --           (629)
Net income (loss)                                   $(37,371)      $ 13,817       $ 29,140      $ 19,267       $ 44,116

Basic and diluted net income (loss) per
 common share:
 Income (loss) from continuing
  operations                                        $  (1.65)      $   1.72            N/A           N/A            N/A
 Income (loss) from discontinued
  Harding segment                                   $  (3.86)      $   0.28            N/A           N/A            N/A
 Extraordinary loss                                 $  (0.03)      $      -            N/A           N/A            N/A
 Net income (loss)                                  $  (5.54)      $   2.00            N/A           N/A            N/A

Pro forma net income per common share                    N/A            N/A       $   1.88           N/A            N/A

Earnings per limited partnership interest:
 Income from continuing operations
  - Class A                                              N/A            N/A            N/A      $   1.10       $   1.10
  - Class B                                              N/A            N/A            N/A      $   0.18       $   0.40

 Income from discontinued Harding segment
  - Class A                                              N/A            N/A            N/A      $     --       $     --
  - Class B                                              N/A            N/A            N/A      $   0.14       $   0.14

 Extraordinary loss
  - Class A                                              N/A            N/A            N/A      $     --       $     --
  - Class B                                              N/A            N/A            N/A           N/A       $  (0.03)

 Net income
  - Class A                                              N/A            N/A            N/A      $   1.10       $   1.10
  - Class B                                              N/A            N/A            N/A      $   0.32       $   1.45

Dividends declared per common share                 $   0.10       $   0.40       $   0.10           N/A            N/A

Cash distributions declared per
  limited partnership interest
  - Class A                                              N/A            N/A            N/A      $   1.10           1.10
  - Class B                                              N/A            N/A            N/A      $   0.33       $   0.67


Balance Sheet Data at December 31:

Total assets                                        $323,017       $330,240       $297,541      $254,806       $246,075
Long-term debt and capitalized
 lease obligations                                  $122,973       $95,842        $93,728       $ 69,150       $ 63,934
</TABLE>


                                       18

<PAGE>




Item 7 - Management's Discussion and Analysis of Financial
         Condition and Results of Operations.




The following discussion provides information which management believes is
relevant to an assessment and understanding of the Company's operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere herein.


General

SunSource Inc. (the "Company" or "SunSource") is one of the largest providers of
value-added services and products to retail and industrial markets in North
America. The Company is organized into four business segments which are
SunSource Technology Services Company, Inc. ("Technology Services" or "STS"),
The Hillman Group, Inc.("Hillman"), Kar Products, Inc. ("Kar Products" or "Kar")
and Integrated Supply, operating as SunSource Integrated Services de Mexico,
S.A. DE C.V.

Technology Services offers a full range of technology-based products and
services to small, medium and large manufacturers. The Hillman Group provides
small hardware and related items and merchandising services to retail outlets,
primarily hardware stores, home centers and lumberyards. Kar Products provides
personalized, small parts inventory management services to low volume customers.
Integrated Supply provides major industrial manufacturing customers with
comprehensive inventory management services for their maintenance, repair and
operating supplies.

In December 1999, the Board of Directors approved a plan to dispose of the
Company's Harding Glass, Inc. subsidiary ("Harding"). Harding has been accounted
for as a discontinued operation and, accordingly, its results of operations were
segregated from results of the Company's ongoing businesses including
restatement of prior periods presented. In 1999, the Company recorded a loss of
$2.2 million after-tax from Harding's operations and an estimated loss on its
expected disposal of $23.8 million unadjusted for any potential future tax
benefits.


Refinancing

On December 15, 1999, the Company refinanced its $90 million bank revolving
credit and $60 million senior notes with $155 million in senior secured credit
facilities (the "Refinancing").

The new senior debt arrangement has a five-year term which consists of a $25
million term loan and a $130 million revolving credit line. The availability of
the revolving credit line is based on the Company's balances in receivables and
inventories, evaluated on a monthly basis.

Related to the Refinancing, the Company incurred an extraordinary loss of $0.2
million (net of $0.1 million in deferred tax benefits) due to the write-off of
capitalized financing costs as a result of the early extinguishment of the
former credit facilities.

                                       19

<PAGE>



Corporate Reorganization

After the close of business, on December 31, 1998, the Company reorganized its
primary operating subsidiary, SDI Operating Partners, L.P. (the "Operating
Partnership"), by contributing its assets and liabilities to newly-formed
corporate subsidiaries organized according to the Company's current operating
structure (the "Reorganization"). The Reorganization allows the Company to
implement certain state and local tax planning strategies, to offer its key
employees incentive stock options and align its operating businesses in
corporate form. As a result of the Reorganization, the Operating Partnership and
its general partner, SDI Partners I, L.P. cease to exist.

Restructuring Charges and Asset Write-downs

In the second quarter of 1999, the Company recorded restructuring charges and
asset write-downs aggregating $10.2 million. These non-recurring charges and
write-downs were a result of the Company's plan to reposition Technology
Services and Kar Products, write-off key machines at the Hillman division, and
realign corporate overhead expenses (the "1999 Restructuring Plan"). These
charges and write-downs were composed of $5.4 million related to Technology
Services, $1.0 million related to Kar Products, $3.3 million related to Hillman,
and $0.5 million related to Corporate Headquarters. The Company completed the
1999 Restructuring Plan during the fourth quarter of 1999.

The Technology Services charges and write-downs of $5.4 million includes
termination benefits of $2.8 million, an inventory write-down of $2.1 million,
other exit costs of $0.4 million and a write-down of unamortized leasehold
improvements of $0.1 million. STS terminated 94 employees as a result of the
1999 Restructuring Plan.

The Kar Products charge of $1.0 million was comprised solely of termination
benefits. Kar terminated 10 employees as a result of the 1999 Restructuring
Plan.

The Hillman asset write-off of $3.3 million was primarily the result of
Hillman's inability to recover key machines from retailers and represents the
remaining net book value of key machine capitalized costs as of June 30, 1999.

The Corporate Headquarters component of the restructuring charge was comprised
of other exit costs of $0.4 million and termination benefits of $0.1 million.

See Note 1 of "Notes to Consolidated Financial Statements" for the accounting
recognition of the restructuring charges.

Acquisitions

On April 22, 1998, Hillman acquired the assets of a manufacturer of letters,
numbers and signs which had sales of approximately $1.0 million for the
twelve-month period prior to acquisition.

On May 6, 1998, Hillman acquired the assets of the franchise and independent
hardware segment of Axxess Technologies, Inc., including its PMI division, a
distributor of keys, letters, numbers and signs and other products to retail
hardware stores throughout the United States. Sales from the acquired operations
were approximately $17.0 million in 1997 and the twelve-month period prior to
acquisition. Hillman integrated the sales force and operations of the acquired
businesses with its existing operations.


                                       20

<PAGE>



On October 21, 1998, Hillman acquired the assets of SIGN-KO, a Dallas-based
manufacturer and distributor of letters, numbers, signs and related products.
SIGN-KO served a customer base that included large home improvement retailers
and independent hardware stores. Sales from the acquired operations were
approximately $3.0 million in 1997 and the twelve-month period prior to
acquisition.

Sales from hardware-related companies acquired by Hillman during 1998 aggregated
approximately $21.0 million for the twelve-month period prior to acquisition and
generated sales of $10.3 million from the date acquired through December 31,
1998. Sales in 1999 from these acquired businesses aggregated approximately
$18.8 million.

Net cash consideration paid for the businesses acquired by the Company in 1998,
including transaction costs, was $10.8 million, plus the assumption of certain
liabilities of $1.1 million.

On October 28, 1999, the Company entered into a merger agreement to acquire
Axxess Technologies, Inc. ("Axxess") of Tempe, Arizona through a stock merger
transaction. Axxess is a manufacturer of key duplication and identification
systems. The transaction is being structured as a purchase of 100% of the stock
of the privately held company and repayment of outstanding Axxess debt in
exchange for $110 million in cash and subordinated notes. The transaction is
expected to close on or about March 31, 2000 subject to certain closing
conditions.


Divestitures

On March 2, 2000 the Company contributed the interests in its Kar Products, Inc.
and A. & H. Bolt & Nut Company Limited operations (collectively, the "Kar"
business) to a newly-formed partnership affiliated with Glencoe Capital, L.L.C.
("Glencoe"). Glencoe contributed cash equity to the new partnership, G-C Sun
Holdings L.P. ("G-C"). The Company received $105 million in cash proceeds from
the transaction though repayment of assumed debt by G-C. Affiliates of Glencoe
will hold a 51% controlling interest with the remaining 49% interest held by
SunSource. The Company will account for its investment in the partnership in
accordance with the equity method and expects to record an after-tax gain on the
transaction of approximately $51 million in the first quarter of 2000.

On January 10, 2000, the Company signed a letter of intent to sell its Harding
Glass operation to a strategic purchaser. The transaction is expected to result
in the sale of Harding's assets for cash plus the assumption of certain
liabilities. SunSource recorded an expected loss on the sale of Harding in 1999
in the amount of $23.8 million or $3.53 per common share. Sales from Harding
were $118.3 million for the year ended December 31, 1999. The Company expects to
consummate the sale of Harding in the second quarter 2000.

                                       21

<PAGE>
<TABLE>
<CAPTION>
Results of Operations

Segment Sales and Profitability from Continuing Operations for the Three Years Ended December 31, 1999
------------------------------------------------------------------------------------------------------
                  (dollars in thousands)

                                                        1999                           1998                          1997
                                            ---------------------------     ---------------------------  ---------------------------

                                                               % Total                         % Total                      % Total
Sales -- continuing operations                                   Sales                           Sales                        Sales
                                                               -------                         -------                      -------
<S>                                         <C>                  <C>        <C>                  <C>        <C>               <C>
Technology Services (STS)                   $ 242,643            43.7%      $ 318,500            51.6%      $ 318,984         52.6%
Hardware Merchandising (Hillman) (1) (2)      151,884            27.3%        125,830            20.4%        103,971         17.1%
Expediter (Kar)                               124,724            22.5%        124,536            20.2%        125,911         20.8%
Integrated Supply - remaining business         20,125             3.6%         16,825             2.7%         11,164          1.8%
Integrated Supply - sold business
  and terminated contracts (3)                 16,276             2.9%         31,827             5.1%         46,419          7.7%
                                            ----------       ---------      ---------          -------      ---------       --------
    Consolidated net sales                  $ 555,652           100.0%      $ 617,518           100.0%      $ 606,449        100.0%
                                            ==========       =========      =========          =======      =========       ========

                                                               % SALES                          % SALES                      % SALES
                                                               -------                          -------                      -------
Gross Profit -- continuing operations
Technology Services (STS) (4)               $  55,117            22.7%      $  85,215            26.8%      $  84,826         26.6%
Hardware Merchandising (Hillman) (2)           81,045            53.4%         66,485            52.8%         54,901         52.8%
Expediter (Kar)                                86,204            69.1%         88,175            70.8%         90,171         71.6%
Integrated Supply - remaining business          4,403            21.9%          4,217            25.1%          2,260         20.2%
Integrated Supply - sold business
  and terminated contracts (3)                  2,484            15.3%          9,090            28.6%         12,479         26.9%
                                            ---------                       ---------                       ---------
     Consolidated gross profit
       before inventory write-down
       related to restructuring               229,253            41.3%        253,182            41.0%        244,637         40.3%
Inventory write-down
  related to restructuring                     (2,130)                              -                               -
                                            ---------                      ----------                       ---------
     Consolidated gross profit              $ 227,123            40.9%      $ 253,182            41.0%      $ 244,637         40.3%
                                            =========                      ==========                       =========

EBITDA -- continuing operations (7)
Technology Services (STS) (5)               $ (12,477)           (5.1%)     $  15,138             4.8%      $  16,072          5.0%
Hardware Merchandising (Hillman)               15,816            10.4%         13,477            10.7%         11,580         11.1%
Expediter (Kar)                                18,965            15.2%         21,196            17.0%         21,583         17.1%
Integrated Supply - remaining business            954             4.7%            977             5.8%            257          2.3%
Integrated Supply - sold business
  and terminated contracts (3)                 (2,104)          (12.9%)         1,528             4.8%          3,333          7.2%
                                            ---------                       ---------                       ---------
      Total operations before
        corporate expenses                     21,154             3.8%         52,316             8.5%         52,825          8.7%
Corporate expenses, net (6)                    (9,653)           (1.7%)        (7,165)           (1.2%)        (7,961)        (1.3%)
                                            ---------                       ---------                       ---------
     Consolidated EBITDA before
       non-recurring items                     11,501             2.1%         45,151             7.3%         44,864          7.4%
Gain on curtailment
    of pension plan                             5,608                               -                               -
Restructuring charges including
  asset and inventory write-downs             (10,248)                              -                               -
Provision for litigation matters
  - divested operations                             -                          (1,600)                              -
                                            ---------                       ---------                       ---------
     Consolidated EBITDA                    $   6,861             1.2%       $ 43,551             7.1%      $  44,864          7.4%
                                            =========                       =========                       =========
</TABLE>

<PAGE>


(1)  Includes sales from businesses acquired in 1998 of $18,883 and $10,322 for
     the twelve months ended December 31, 1999 and 1998, respectively.

(2)  Includes a reduction in sales and gross profit of $4,680 and $3,424 for the
     twelve months ended December 31, 1998 and 1997, respectively to conform to
     current accounting for customer rebates.

(3)  Represents sales, gross profit and EBITDA from the OEM Fastener Business,
     which was sold on July 1, 1999 and terminated contracts from 1999, 1998 and
     1997.

(4)  Includes other nonrecurring charges related to warranty claims, customer
     credits and other inventory adjustments in the Technology Services
     divisions of $5,030 for the twelve months ended December 31, 1999.
     Excluding these charges, Technology Services gross profit was $60,147 or
     24.8% for the twelve months ended December 31, 1999.

(5)  Includes other nonrecurring charges related to the integration and
     consolidation of the Technology Services divisions of $8,956 for the twelve
     months ended December 31, 1999. Excluding these charges, Technology
     Services EBITDA was ($3,521) or (1.5%) for the twelve months ended December
     31, 1999.

(6)  Includes other income of $420, $428 and $394 for the twelve months ended
     December 31, 1999, 1998 and 1997, respectively.

(7)  "EBITDA" (earnings before interest, taxes, depreciation and amortization)
     is defined as income (loss) from continuing operations before depreciation,
     amortization and results of the discontinued Harding segment. 1997 excludes
     $2,491 of management fees, $263 of expenses related to minority ownership
     and $3,053 of trasaction costs related to the Company's conversion from
     partnership to corporate form (the "Conversion").

                                       22
<PAGE>




         Years Ended December 31, 1999 and 1998


Net sales from continuing operations decreased $61.8 million or 10.0% in 1999 to
$555.7 million from $617.5 million in 1998. Sales variances by business segment
are as follows:

                                                 Sales Increase (Decrease)
                                                 -------------------------
                                                  Amount                  %
                                                  ------                 ---
                                             (In thousands)
                                             --------------
         Technology Services                   $(75,857)               (23.8)%
         Hillman                                 26,054                 20.7 %
         Kar Products                               188                  0.2 %
         Integrated Supply                      (12,251)               (25.2)%
                                               --------
             Total Company                     $(61,866)               (10.0)%
                                               ========

Technology Services sales decreased $75.9 million or 23.8% in 1999 to $242.6
million from $318.5 million in 1998 as a result of the restructuring of the
sales force as well as the effects of the global economy on original equipment
manufacturers' end markets. Hillman's sales increased $26.1 million or 20.7% in
1999 to $151.9 million from $125.8 million in 1998 as a result of growth from
new accounts and expansion of new and existing product lines. Kar sales
increased slightly in 1999 to $124.7 million from $124.5 million in 1998.
Integrated Supply sales decreased $12.3 million or 25.2% in 1999 from $48.7
million in 1998 as a result of the sale of the OEM Fastener Business on July 1,
1999 which contributed sales of $11.0 million in 1999 versus $23.0 million in
the prior-year and terminated contracts which generated sales of $5.3 million in
1999 versus $8.8 million in 1998. Excluding sales from the sold OEM Fastener
Business and terminated contracts, Integrated Supply sales increased 19.6% in
the comparison period.

The Company's sales backlog on a consolidated basis was $50.1 million as of
December 31, 1999, compared with $60.0 million at December 31, 1998, a decrease
of 16.5%.

The Company's consolidated gross margin from continuing operations was 42.2% in
1999 (before the inventory write-down of $2.1 million related to the
Restructuring Plan and non-recurring charges of $5.0 million related to
integration of the Technology Services divisions) compared with 41.0% in 1998.
Technology Services' gross margin before the aforementioned charges decreased
2.0% in 1999 as a result of the decrease in sales levels in relation to the
fixed cost component of cost of goods sold for service and repair facilities and
sales mix. Hillman's gross margin increased 0.6% in the comparison period as a
result of substantial increases in sales of keys to major U.S. hardware chains
and home centers carrying higher margins than hardware and related products.
Kar's gross margin declined 1.7% in 1999 as a result of increased packaging cost
absorption in the 1999 period, a change in sales mix and competitive pricing
pressures. The Integrated Supply segment's gross margin decreased 8.5% in 1999
resulting mainly from the sale of the OEM Fastener Business and cancellation of
certain contracts which carried higher margins than the retained Integrated
Supply business.

The Company's selling, general and administrative expenses ("S,G&A") from
continuing operations, before non-recurring charges of $4.0 million related to
integration of STS, increased by $6.2 million to $214.5 million in 1999 from
$208.3 million in 1998. Selling expenses on a consolidated basis remained
constant with 1998 but decreased in most businesses as a result of cost savings
associated with the 1999 Restructuring Plan and reduced sales levels offset by
an increase at Hillman as a result of 1998 acquisition activity. Warehouse and
delivery expenses

                                       23

<PAGE>



increased $4.3 million as a result of integration costs for the 1998
acquisitions at Hillman and facility reorganization costs at Technology Services
offset slightly by decreases from cost savings associated with the 1999
Restructuring Plan. The increase in general and administrative expenses of $1.9
million is attributable to the integration of the newly acquired businesses at
Hillman and increased facilities costs in the Technology Services division
offset by cost savings associated with the 1999 Restructuring Plan.

S,G&A expenses from continuing operations as a percentage of sales excluding the
previously mentioned non-recurring charges compared with 1998 are as follows:

                                                Twelve Months ended December 31,
                                                --------------------------------

                                                      1999               1998
                                                      ----               ----
         Selling Expenses                             20.5%              18.4%
         Warehouse and Delivery Expenses               6.8%               5.5%
         General and Administrative Expenses          11.3%               9.8%
                                                      -----              -----
                  Total S,G&A Expenses                38.6%              33.7%
                                                     ======              =====

Overall, as a percentage of sales, total S,G&A expenses increased due mainly to
the decrease in sales levels in relation to the fixed cost component of S,G&A
expenses.

EBITDA from continuing operations was $20.5 million for the year ended December
31, 1999 after corporate expenses and before the 1999 Restructuring Plan charges
of $10.2 million, and non-recurring charges of $9.0 million related to the
integration and consolidation of the Technology Services divisions, compared
with $43.6 million for the prior-year. The 1998 period includes a nonrecurring
charge of $1.6 million for outstanding litigation matters related to divested
businesses.

The Company's consolidated operating profit margin (EBITDA from continuing
operations, as a percentage of sales) after corporate expenses and before the
aforementioned non-recurring charges declined to 3.7% in 1999 compared with 7.1%
in the prior-year. Technology Services operating profit margin decreased to
(1.5%) from 4.8% in 1998, primarily reflecting reduced 1999 sales and increased
expenses related to the reorganization of sales and administrative functions.
Hillman's operating profit margin excluding the 1999 Restructuring Plan charges
decreased to 10.4% in 1999 from 10.7% in 1998 as a result of sales discounts and
allowances to attract new accounts and increased selling expenses for new field
staff related primarily to 1998 acquisition activities. Kar's operating profit
margin decreased to 15.2% from 17.0% as a result of the gross margin decline
discussed above.

Interest expense, net increased $2.9 million in 1999 from $6.8 million in 1998
due primarily to increased borrowings on the Company's revolving credit facility
as a result of cash requirements to fund the Company's acquisition activities
and working capital requirements.

The Company pays interest to the Trust on the Junior Subordinated Debentures
underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the
aggregate. The Trust distributes an equivalent amount to the holders of the
Trust Preferred Securities. For the years ended December 31, 1999 and 1998, the
Company paid $12.2 million in interest on the Junior Subordinated Debentures,
equivalent to the amounts distributed by the Trust on the Trust Preferred
Securities.





                                       24

<PAGE>


The Company is subject to federal, state and local income taxes on its domestic
operations and foreign income taxes on its Canadian and Mexican operations as
accounted for in accordance with Statement of Financial Accounting Standard
("SFAS") 109, "Accounting for Income Taxes". Deferred income taxes represent
differences between the financial statement and tax bases of assets and
liabilities as classified on the Company's balance sheet. See Note 5 of Notes to
Consolidated Financial Statements of the Company for the three years ended
December 31, 1999, for income taxes and related disclosures.

         Years Ended December 31, 1998 and 1997

Net sales from continuing operations increased $11.1 million or 1.8% in 1998 to
$617.5 million from $606.4 million in 1997. Sales variances by segment are as
follow:

                                              Sales Increase (Decrease)
                                              -------------------------
                                                 Amount                  %
                                                 ------                 ---
                                              (In thousands)
                                              --------------
         Technology Services                    $   (484)              (0.2)%
         Hillman                                  21,859               21.0 %
         Kar Products                             (1,375)              (1.1)%
         Integrated Supply                        (8,931)             (15.5)%
                                                --------
             Total Company                      $ 11,069                1.8 %
                                                ========

Technology Services sales decreased slightly in 1998 to $318.5 million from
$319.0 million in 1997 as a result of the restructuring of the sales force as
well as the effects of the Asian economic crisis on STS' original equipment
manufacturing customers. Hillman's sales increased $21.9 million or 21.0% in
1998 to $125.8 million from $104.0 million in 1997 resulting from market
penetration of new product lines in the amount of $5.4 million, sales from newly
acquired businesses of $10.3 million and the balance of $6.2 million in growth
from new accounts and expansion of existing product lines. Kar sales decreased
$1.4 million or 1.1% in 1998 to $124.5 million from $125.9 million in 1997 as a
result of competitive pricing pressures as well as continued deterioration in
the Canadian dollar. Integrated Supply sales decreased $8.9 million or 15.5% in
1998 to $48.7 million from $57.6 million in 1997 as a result of a net decrease
of $14.6 million resulting from contracts which were canceled in 1998 and 1997
and a decline in the OEM Fastener business which was sold in 1999.

The Company's consolidated gross margin from continuing operations was 41.0% in
1998 compared with 40.3% in 1997. Technology Services' gross margin increased
0.2% in 1998 as a result of tighter pricing controls. Hillman's gross margin
remained constant with 1997. Kar's gross margin declined 0.8% in 1998 as a
result of competitive pricing pressures and higher freight costs. Integrated
Supply's gross margin increased 1.8% in 1998 as a result of sales mix.

The Company's S,G&A expenses increased by $8.8 million or 4.4% to $208.3 million
in 1998 from $199.5 million in 1997. Selling expenses increased $4.1 million
supporting increased 1998 sales levels and increased marketing efforts at
Hillman. Warehouse and delivery expenses increased $1.9 million or 6.0%
principally at Hillman to support increased sales levels. The increase in
general and administrative expenses of $2.7 million or 4.6% is net of expense
reductions of $1.5 million associated with the replacement of cash basis
deferred compensation awards with stock options.





                                       25

<PAGE>





S,G,&A expenses as a percentage of sales increased compared with 1997, as
follow:

                                                            Twelve Months
                                                            -------------
                                                       1998                1997
                                                       ----                ----
         Selling Expenses                              18.4%               18.0%
         Warehouse and Delivery Expenses                5.5%                5.2%
         General and Administrative Expenses            9.8%                9.7%
                                                      ------               -----
                  Total S,G&A Expenses                 33.7%               32.9%
                                                      ======               =====


EBITDA from continuing operations after corporate expenses was $43.6 million for
the twelve months ended December 31, 1998, compared with $44.9 million for the
same prior-year period. The 1998 period includes a nonrecurring charge of $1.6
million for outstanding litigation matters related to divested businesses.

The Company's consolidated operating profit margin (EBITDA from continuing
operations, as a percentage of sales) after corporate expenses decreased
slightly to 7.1% in 1998 compared with 7.4% in the prior year. Technology
Services' operating profit margin declined to 4.8% in 1998 from 5.0% in 1997,
primarily reflecting increased expenses related to the reorganization of sales
and administrative functions. Hillman's operating profit margin declined in 1998
to 10.7% from 11.1% in 1997 due to increased selling expenses for new field
staff related primarily to acquisition activities. Integrated Supply's operating
profit margin decreased to 5.1% in 1998 from 6.2% in 1997 due primarily to the
previously mentioned canceled contracts.

Depreciation expense increased $0.9 million to $4.2 million in 1998 from $3.3
million in 1997 due primarily to the acquisition activity at Hillman and an
overall increase in the depreciable fixed asset base due to investment in the
Company's core businesses.

Under partnership form, the management fee due the General Partner amounted to
$3.3 million annually. Upon Conversion, the management fee is retained by a
wholly- owned subsidiary of the Company and is eliminated in consolidation. The
amount for 1997 of $2.5 million is based on nine months only through the
Conversion date.

Other income, net, increased $0.7 million in 1998 to $0.2 million from an
expense of $0.5 million in 1997 due primarily to the elimination of expenses
related to minority ownership as a result of the Conversion and other
non-recurring expenses related to divested operations.

The Company pays interest to the Trust on the Junior Subordinated Debentures in
the amount of 11.6% per annum on their face amount of $105.4 million. The Trust
distributes an equivalent amount to the holders of the Trust Preferred
Securities. For the years ended December 31, 1998 and 1997, the Company paid
$12.2 million and $3.1 million, respectively, in interest on the Junior
Subordinated Debentures, equivalent to the amounts distributed by the Trust. The
1997 amount of $3.1 million represents payments made from the Conversion date
through December 31, 1997. On an annual basis, the interest payments and Trust
distributions amount to $12.2 million.





                                       26

<PAGE>



Liquidity and Capital Resources

The Company's cash position of $5.2 million as of December 31, 1999, increased
$2.5 million from the balance at December 31, 1998. Cash was provided during
this period primarily from net borrowings under the bank revolver ($67.8
million), proceeds from issuance of a senior secured term loan ($25.0 million),
proceeds from sale of the OEM Fastener Business ($8.8 million))and proceeds from
the sale of property and equipment($5.1 million). Cash was used during this
period predominantly for early extinguishment of senior notes ($60.0 million),
an increase in net assets held for sale of the discontinued Harding operation
($17.6 million), cash used in operations ($10.3 million), capital expenditures
($4.8 million), financing fees and other costs related to debt refinancing ($3.5
million), repayment of senior secured term loan ($3.5 million) and other
disbursements, net ($4.5 million).

The Company's net interest coverage ratio from continuing operations for 1999
declined to 0.65X (earnings before interest, distributions on trust preferred
securities and income taxes, excluding non-recurring items, over net interest
expense and distributions on trust preferred securities), from 2.06X in 1998 as
a result of reduced earnings and increased interest expense.

The Company's working capital position of $135.6 million at December 31, 1999,
represents a decrease of $14.9 million from the December 31, 1998 level of
$150.5 million. The Company's current ratio decreased to 2.56x at December 31,
1999 from 2.74x at December 31, 1998.

As of December 31, 1999, the Company had $14.1 million available under its
senior secured credit facilities. The Company had $126.7 million of outstanding
long-term debt at December 31, 1999, consisting of a $21.5 million senior
secured term loan at 8.50% as of December 31, 1999, bank revolver borrowings
totaling $102.8 million at an effective interest rate of 8.50%, and capitalized
lease obligations of $2.4 million at various interest rates. An indirect,
wholly-owned Canadian subsidiary of the Company had a $2.5 million Canadian
dollar line of credit for working capital purposes, of which no amount was
outstanding at December 31, 1999.

As of December 31, 1999, the Company's senior debt (including distributions
payable) as a percentage of its consolidated capitalization (senior debt, trust
preferred securities and stockholders' equity) was 56.6% compared with 41.5% at
December 31, 1998. The Company's consolidated capitalization (including
distributions payable) as of December 31, 1999, was $225.7 million compared to
$232.8 million at December 31, 1998.

On December 15, 1999, the Company refinanced its $90 million bank revolver and
$60 million senior notes with $155 in senior secured credit facilities. The new
financing which has a five-year term provides SunSource with adequate funds for
working capital and other corporate requirements.

On March 2, 2000, SunSource contributed the interests in the Company's Kar
Products subsidiary including its Canadian operation, to a newly formed
partnership affiliated with Glencoe as previously mentioned. The Company
received $105 million in cash proceeds from the transaction and expects to
record an after-tax gain of approximately $51 million which has restored the
Company's stockholders' equity to a significant positive position of over $33
million from its deficit balance of $17 million at December 31, 1999. In
addition, SunSource's remaining $25 million investment in Kar or 49% ownership
interest allows the Company to participate in the capital appreciation of Kar in
the future with Glencoe.


                                       27

<PAGE>



With the proceeds from the Kar transaction, the Company expects to complete the
acquisition of Axxess. With the Axxess merger into the Company's Hillman Group,
management expects integration cost savings of over $5 million annualized from
the combined operations.

The Company expects to further strengthen its financial position upon
consummation of the sale of the Harding Glass business, which was announced on
January 10, 2000. Proceeds from this sale will be used to repay debt, thus
allowing the outstanding borrowings to be supported almost entirely by the
Company's investment in receivables and inventories in SunSource's remaining
businesses. The Harding transaction is expected to close in the second quarter
2000. Senior debt as a percentage of consolidated capitalization is expected to
be approximately 40% with the divestment of the Kar and Harding Glass Segments
and the inclusion of the Axxess acquisition.

The Company spent $4.8 million for capital expenditures in 1999, primarily for
warehouse improvements, machinery and equipment, computer hardware and software.

On June 30, 1999, the Board of Directors of the Company suspended indefinitely
the quarterly cash dividend of $.10 per common share.

On August 6, 1998, the Company's Board of Directors authorized $15.0 million for
management to repurchase up to 10% of the Company's outstanding common shares
through open market transactions and private block trades dependent upon market
conditions. The Company subsequently suspended the repurchase program on March
16, 1999. The Company has acquired and placed into treasury 479,100 common
shares through December 31, 1999, at an average cost of $18.17 per common share.

On March 27, 1998, the Company closed an offering of its Common Shares (the
"Offering"). Of the 2,284,471 shares sold in the Offering, 796,408 shares
("Primary") were issued and sold by the Company and 1,488,063 shares
("Secondary") were sold by selling stockholders, affiliates of Lehman Brothers,
Inc. The Company did not receive any of the proceeds from the Secondary shares
sold by the selling stockholders. The Company used the net proceeds raised (of
approximately $20.8 million) from the Primary shares sold in the Offering to
repay borrowings under its revolving credit facility.

The Company has deferred tax assets aggregating $16.1 million as of December 31,
1999, as determined in accordance with SFAS 109. Management believes that the
Company's deferred tax assets will be realized through the reversal of existing
temporary differences between the financial statement and tax bases, as well as
through future taxable income.

Year 2000 Issue
All of the Company's operating segments successfully met the year 2000
compliance requirement for proprietary and purchased software, and machinery and
equipment utilized in the daily business process. In addition, the Company's
suppliers or customers did not experience any material year 2000
compliance-related problems of which the Company is aware.

All operating divisions will continue to monitor their non-critical processing
software to ensure that all non-critical programs have been successfully
executed in the year 2000.

The Company's established Year 2000 compliance budget of $1.7 million, funded
from operating cash flows, was not exceeded. In addition, the Company expects
only minimal additional expenses, if any, during 2000 related to the Year 2000
compliance issue.

                                       28

<PAGE>




Inflation

Inflation in recent years has had a modest impact on the operations of the
Company. Continued inflation, over a period of years at higher than current
rates, would result in significant increases in inventory costs and operating
expenses. However, such higher cost of sales and operating expenses can
generally be offset by increases in selling prices, although the ability of the
Company's operating divisions to raise prices is dependent on competitive market
conditions.

Forward Looking Statements

Certain disclosures related to NYSE listing, acquisitions and divestitures, the
1999 Restructuring Plan, Refinancing and capital expenditures contained in this
report involve risks and uncertainties and may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. We have based these forward-looking statements on our current
expectations, assumptions and projections about future events. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Actual results could differ materially from those
currently anticipated as a result of a number of factors, including the risks
and uncertainties discussed under captions "Risk Factors" - Restructuring, Risks
Associated with Acquisitions and the New York Stock Exchange Listing set forth
in Item 1 of this Form 10-K. Given these uncertainties, current or prospective
investors are cautioned not to place undue reliance on any such forward-looking
statements.

In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "could," "would," "expect," "plan," "anticipate,"
"believe," "estimate," "continue" or the negative of such terms or other similar
expressions. All forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements included in this Report. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this Report might not
occur.


Item 7A - Quantitative and Qualitative Disclosures About Market Risk.


Not Applicable.



                                       29
<PAGE>





Item 8 - Financial Statements and Supplementary Data.




                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULE

                                                                            Page

Report of Independent Accountants                                             31

Financial Statements:


Consolidated Balance Sheets, December 31, 1999 and 1998                       32

Consolidated Statements of Operations, Years ended
  December 31, 1999, 1998 and 1997                                            33

Consolidated Statements of Cash Flows, Years ended
  December 31, 1999, 1998 and 1997                                            34

Consolidated Statements of Changes in Partners' Capital
  and Stockholder's Equity for the Year ended December 31, 1997
  and Changes in Stockholders' Equity (Deficit) for the
  Years ended December 31, 1998 and 1999                                      35

Notes to Consolidated Financial Statements                                 36-61

Financial Statement Schedule:

Valuation Accounts                                                            62





                                       30

<PAGE>









                        Report of Independent Accountants






The Board of Directors
  SunSource Inc.


In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
SunSource Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ending December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and the significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.







PricewaterhouseCoopers LLP

February 9, 2000

                                       31
<PAGE>

                         SUNSOURCE INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)

<TABLE>
<CAPTION>

                                                                             December 31, December 31,
                                     ASSETS                                     1999         1998
                                                                              ---------    ---------
<S>                                                                           <C>          <C>
Current assets:
  Cash and cash equivalents                                                   $   5,186    $   2,673
  Accounts receivable, net of
    allowance for doubtful accounts of
    $2,272 and $2,184, respectively                                              65,141       77,239
  Inventories                                                                    92,691      102,190
  Deferred income taxes                                                          10,218        9,043
  Net assets held for sale                                                       35,249       40,987
  Income taxes receivable                                                         8,561         --
  Other current assets                                                            5,226        4,701
                                                                              ---------    ---------
      Total current assets                                                      222,272      236,833
Property and equipment, net                                                      17,282       21,744
Goodwill and other intangibles (net of accumulated amortization
  of $19,798 and $18,827, respectively)                                          52,404       55,957
Deferred financing fees                                                           3,493          485
Deferred income taxes                                                             5,865        4,281
Cash surrender value of life insurance policies                                  14,190       10,262
Other assets                                                                      7,511          678
                                                                              ---------    ---------

      Total assets                                                            $ 323,017    $ 330,240
                                                                              =========    =========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable                                                            $  44,358    $  51,971
  Notes payable                                                                     376          796
  Current portion of capitalized lease obligations                                  923          276
  Dividends / distributions payable                                               1,019          676
  Deferred tax liability                                                            929          929
  Current portion of long term debt                                               3,750         --
  Accrued expenses:
    Salaries and wages                                                            5,343        6,698
    Income and other taxes                                                        3,299        3,830
    Accrued liabilities on discontinued operation                                 2,703         --
    Other accrued expenses                                                       23,961       21,123
                                                                              ---------    ---------
      Total current liabilities                                                  86,661       86,299
Long term debt                                                                   17,750       60,000
Bank revolving credit                                                           102,791       35,000
Capitalized lease obligations                                                     1,509          566
Deferred compensation                                                            14,173       11,802
Other liabilities                                                                 2,148          308
                                                                              ---------    ---------
      Total liabilities                                                         225,032      193,975
                                                                              ---------    ---------

Guaranteed preferred beneficial interests in the
 Company's junior subordinated debentures                                       115,200      115,551
                                                                              ---------    ---------

Commitments and contingencies

Stockholders' equity (deficit):
  Preferred stock, $.01 par, 1,000,000 shares
   authorized, none issued                                                         --           --
  Common stock, $.01 par, 20,000,000 shares authorized,
   7,228,556 issued and 6,749,456 outstanding at December 31, 1999,
   7,217,263 issued and 6,756,163 outstanding at December 31, 1998                   72           72
  Additional paid-in capital                                                     21,342       21,099
  Retained earnings (accumulated deficit)                                       (25,297)      12,748
  Unearned compensation                                                            (283)        (229)
  Accumulated other comprehensive income                                         (4,344)      (4,596)
  Treasury stock, at cost, 479,100 shares at
   December 31, 1999; 461,100 shares at December 31, 1998                        (8,705)      (8,380)
                                                                              ---------    ---------
      Total stockholders' equity (deficit)                                      (17,215)      20,714
                                                                              ---------    ---------

      Total liabilities and stockholders'
        equity (deficit)                                                      $ 323,017    $ 330,240
                                                                              =========    =========
</TABLE>
           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       32



<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        FOR THE YEARS ENDED DECEMBER 31,
                (dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>
                                                               1999           1998          1997
                                                               ----           ----          ----
<S>                                                       <C>            <C>           <C>
Net sales                                                 $   555,652    $   617,518   $   606,449
Cost of sales                                                 326,399        364,336       361,812
Cost of sales - Inventory write-down
  related to restructuring (Note 1)                             2,130             --            --
                                                          -----------    -----------   -----------
   Gross profit                                               227,123        253,182       244,637
                                                          -----------    -----------   -----------

Operating expenses:
  Selling, general and administrative expenses                218,437        208,281       199,544
  Management fee to general partner                              --             --           2,491
  Depreciation                                                  4,272          4,192         3,279
  Amortization                                                  1,847          1,670         1,370
                                                          -----------    -----------   -----------
   Total operating expenses                                   224,556        214,143       206,684
                                                          -----------    -----------   -----------

Restructuring charges and asset write-off (Note 1)              8,118             --            --
Gain on curtailment of defined benefit
  pension plan (Note 16)                                        5,608             --            --
Provision for litigation matters -
  divested operations                                              --          1,600            --
Transaction and other related costs (Note 1)                       --             --         3,053
Other income (expense)                                            685            250          (492)
                                                          -----------    -----------   -----------
   Income from operations                                         742         37,689        34,408

Interest expense, net                                           9,724          6,838         7,193
Distributions on guaranteed preferred
 beneficial interests                                          12,232         12,232         3,058
                                                          -----------    -----------   -----------
   Income (loss) from continuing operations
     before provision (benefit) for income taxes              (21,214)        18,619        24,157

Provision (benefit) for income taxes                          (10,100)         6,762        (6,685)
                                                          -----------    -----------   -----------

   Income (loss) from continuing operations                   (11,114)        11,857        30,842
                                                          -----------    -----------   -----------
Discontinued operations (Note 1)
  Income (loss) from operations of discontinued
    Harding segment, less applicable income
    taxes of ($1,080), $1,562 and $5, respectively             (2,188)         1,960         1,690
  Estimated loss on disposal of discontinued Harding
    segment                                                   (23,834)            --            --
                                                          -----------    -----------   -----------
      Income (loss) from discontinued operations              (26,022)         1,960         1,690
                                                          -----------    -----------   -----------

Income (loss) before extraordinary item                       (37,136)        13,817        32,532

Extraordinary loss from early extinguishment
    of debt, less applicable income taxes of ($126)
     and ($951) in 1999 and 1997, respectively (Note 6)          (235)            --        (3,392)
                                                          -----------    -----------   -----------

    Net income (loss)                                     $   (37,371)   $    13,817   $    29,140
                                                          ===========    ===========   ===========

Basic and diluted income (loss) per common share:
  Income (loss) from continuing operations                $     (1.65)   $      1.72            NA
  Income (loss) from operations of discontinued
    Harding segment, net of taxes                               (0.33)          0.28            NA
  Estimated loss on disposal of discontinued
    Harding segment                                             (3.53)            --            NA
                                                          -----------    -----------
  Income (loss) before extraordinary item                       (5.51)          2.00            NA
  Extraordinary loss from early extinguishment
    of debt, net of taxes                                       (0.03)            --            NA
                                                          -----------    -----------
  Net income (loss)                                       $     (5.54)   $      2.00            NA
                                                          ===========    ===========

Pro forma net income per common share (Note 1)                     NA             NA   $      1.88
                                                                                       ===========

Weighted average number of
  outstanding common shares (Note 1)                        6,747,142      6,907,318     6,418,936
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       33

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED DECEMBER 31,
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                             1999        1998        1997
                                                             ----        ----        ----

<S>                                                        <C>         <C>         <C>
Cash flows from operating activities:
  Net income (loss)                                        $(37,371)   $ 13,817    $ 29,140
  Adjustments to reconcile net income (loss) to net
   cash (used for) provided by operating activities:
     Depreciation and amortization                            6,119       5,862       4,649
     Restructuring charges and asset write-down              10,248        --          --
     Transaction costs                                         --          --         3,053
     Extraordinary loss                                         235        --         3,392
     Loss (income) from discontinued Harding segment         26,022      (1,960)     (1,690)
     Increase in cash value of life insurance                (1,598)       (846)       (525)
     Provision for deferred compensation                       --          --         2,649
     Provision (benefit) for deferred income taxes           (2,759)        996      (7,433)
     Gain on sale of division                                  (365)       --          --
     Gain on curtailment of defined benefit pension plan     (5,608)       --          --
     Changes in current operating items:
        Decrease (increase) in accounts receivable            9,070      (2,199)     (4,240)
        Decrease (increase) in inventories                    1,401      (7,291)       (805)
        Increase in income taxes receivable                  (8,561)       --          --
        Decrease (increase) in other current assets            (619)       (614)        303
        Increase (decrease) in accounts payable              (5,775)      5,893       1,684
        Increase (decrease) in income taxes payable            (546)        134       1,136
        Decrease in accrued interest                           --          --          (473)
        Decrease in accrued restructuring charges
          and transaction costs                              (3,597)     (1,099)     (4,522)
        Increase in other accrued liabilities                 1,459       4,899         197
     Other items, net                                         1,913      (1,384)     (1,365)
                                                           --------    --------    --------

    Net cash provided by (used for) operating activities    (10,332)     16,208      25,150
                                                           --------    --------    --------

Cash flows from investing activities:
  Proceeds from sale of property and equipment                5,131         284         713
  Proceeds from sale of division                              8,827        --          --
  Increase in net assets held for sale                      (17,581)    (10,465)      1,634
  Payments for acquired businesses, net of cash                --       (10,839)       --
  Capital expenditures                                       (4,755)     (6,228)     (4,560)
  Investment in life insurance policies                      (1,300)       (903)     (3,316)
  Other, net                                                   (851)         30         139
                                                           --------    --------    --------

    Net cash used for investing activities                  (10,529)    (28,121)     (5,390)
                                                           --------    --------    --------

Cash flows from financing activities:
  Proceeds from issuance of long term debt                   25,000        --        60,000
  Borrowings under bank credit agreements, net               67,791       2,000      22,000
  Net proceeds from issuance of common stock                   --        20,813        --
  Purchase of treasury stock at cost                           (325)     (8,380)       --
  Cash distributions / dividends to investors                (1,350)     (4,848)    (13,901)
  Cash distributions paid on Class A exchange                  --          --       (14,429)
  Repayment of long term debt                               (63,500)       --       (63,934)
  Prepayment penalties and related costs                       --          --        (4,278)
  Repayments under other credit facilities, net                (420)       (185)       (496)
  Principal payments under capitalized lease obligations       (300)       (210)       (140)
  Other, net                                                 (3,522)       --          (573)
                                                           --------    --------    --------

    Net cash provided by (used for) financing activities     23,374       9,190     (15,751)
                                                           --------    --------    --------

Net increase (decrease) in cash and cash equivalents          2,513      (2,723)      4,009

Cash and cash equivalents at beginning of period              2,673       5,396       1,387
                                                           --------    --------    --------

Cash and cash equivalents at end of period                 $  5,186    $  2,673    $  5,396
                                                           ========    ========    ========
</TABLE>


           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       34
<PAGE>

                         SUNSOURCE INC. AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND STOCKHOLDER'S
                EQUITY FOR THE YEAR ENDED DECEMBER 31, 1997 AND
            CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS
                        ENDED DECEMBER 31, 1998 AND 1999
                             (dollars in thousands)

<TABLE>>
<CAPTION>
                                                                   PARTNERS' CAPITAL
                                                ----------------------------------------------------------
                                                                                               Cumulative
                                                                                                 Foreign
                                                General     Class A     Class B      Class B   Translation
                                                Partner     Limited     Limited     Treasury   Adjustment
                                                -------     -------     -------     --------   -----------
<S>                                                  <C>     <C>         <C>         <C>         <C>
Partners' Capital - December 31, 1996                960     67,642      29,040      (1,514)     (1,509)
  Net income                                         260      9,157      16,633
  Cash distributions paid and/or
    declared to partners                            (150)    (8,140)     (6,730)
  Change in cumulative foreign
    translation adjustment, net of tax                --         --          --          --        (167)
                                                --------   --------    --------    --------    --------
Partners' Capital - September 30, 1997             1,070     68,659      38,943      (1,514)     (1,676)
Conversion adjustments:
  Common stock                                                              (64)
  Paid-in capital                                 (1,070)   (68,659)
  Comprehensive income                                                                            1,676
  Retained earnings                                                     (38,879)      1,514
  Minority ownership (a)
  Class A exchange (b)
  Goodwill - Minority interest (c)
                                                --------   --------    --------    --------    --------
Stockholders' Deficit - September 30, 1997      $     --   $     --    $     --    $     --    $     --
                                                ========   ========    ========    ========    ========

  Net income
  Change in cumulative foreign
     translation adjustment, net of tax
  Adjustment to cash distributions
     declared to partners
  Dividends declared on common stock

Stockholders' Deficit - December 31, 1997


  Net income
  Change in cumulative foreign translation
     adjustment, net of tax

  Comprehensive income
  Issuance of 796,408 shares of common stock
     in public offering
  Issuance of 1,988 shares of common stock
     to certain non-employee directors
  Dividends declared on common stock
  Stock options granted at a discount
  Repurchase of 461,100 shares of common stock

Stockholders' Equity - December 31, 1998

  Net loss
   Change in cumulative foreign translation
    adjustment, net of tax

  Comprehensive income

  Issuance of 11,293 shares of common stock
     to certain non-employee directors
  Dividends declared on common stock
  Repurchase of 18,000 shares of common stock
  Stock options granted at a discount
  Amortization of stock option discount

Stockholders' Deficit - December 31, 1999

</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
                                                   STOCKHOLDERS' EQUITY (DEFICIT)
                                               ---------------------------------------
                                                                          Retained
                                                             Additional  Earnings /
                                                  Common       Paid-in  (Accumulated
                                                  Stock        Capital     Deficit)
                                                ---------    ---------- ------------
<S>                                               <C>          <C>         <C>
Partners' Capital - December 31, 1996
  Net income
  Cash distributions paid and/or
    declared to partners
  Change in cumulative foreign
    translation adjustment, net of tax                --           --           --
                                                --------     --------     --------
Partners' Capital - September 30, 1997                --           --           --
Conversion adjustments:
  Common stock                                        64
  Paid-in capital                                              68,659        1,070
  Comprehensive income
  Retained earnings                                                         37,365
  Minority ownership (a)                                                     1,082
  Class A exchange (b)                                        (68,659)     (61,761)
  Goodwill - Minority interest (c)                                          20,759
                                                --------     --------     --------
Stockholders' Deficit - September 30, 1997            64           --       (1,485)


  Net income                                                                 3,090
  Change in cumulative foreign
     translation adjustment, net of tax
  Adjustment to cash distributions
     declared to partners                                                      772
  Dividends declared on common stock                                          (642)
                                                --------     --------    ---------
Stockholders' Deficit - December 31, 1997             64           --        1,735


  Net income                                                                13,817
  Change in cumulative foreign translation
     adjustment, net of tax

  Comprehensive income
  Issuance of 796,408 shares of common stock
     in public offering                                8       20,806
  Issuance of 1,988 shares of common stock
     to certain non-employee directors                             39
  Dividends declared on common stock                                        (2,804)
  Stock options granted at a discount                             254
  Repurchase of 461,100 shares of common stock
                                                --------     --------    ---------
Stockholders' Equity - December 31, 1998        $     72     $ 21,099    $  12,748

  Net loss                                                                 (37,371)
  Change in cumulative foreign translation
     adjustment, net of tax

  Comprehensive income

  Issuance of 11,293 shares of common stock
     to certain non-employee directors                            119
  Dividends declared on common stock                                          (674)
  Repurchase of 18,000 shares of common stock
  Stock options granted at a discount                             124
  Amortization of stock option discount
                                                --------     --------    ---------
Stockholders' Deficit - December 31, 1999       $     72     $ 21,342    $(25,297)
                                                ========     ========    ========

</TABLE>
<PAGE>>

[RESTUBBED]
<TABLE>>
<CAPTION>                                                             STOCKHOLDERS' EQUITY (DEFICIT)
                                                                       STOCKHOLDERS' EQUITY (DEFICIT)
                                                  ---------------------------------------------------------------
                                                                  Accumulated                    Total Partners'
                                                                     Other                          Capital /
                                                    Unearned      Comprehensive     Treasury       Stockholders'
                                                  Compensation      Income (d)        Stock      (Deficit) Equity
                                                  ------------    -------------     --------     ----------------
<S>                                                   <C>             <C>              <C>            <C>
Partners' Capital - December 31, 1996                                                                 94,619
  Net income                                                                                          26,050
  Cash distributions paid and/or
    declared to partners                                                                             (15,020)
  Change in cumulative foreign
    translation adjustment, net of tax                    --               --             --            (167)
                                                    --------         --------       --------        --------
Partners' Capital - September 30, 1997                    --               --             --         105,482
Conversion adjustments:
  Common stock
  Paid-in capital                                                                                         --
  Comprehensive income                                                 (1,676)                            --
  Retained earnings                                                                                       --
  Minority ownership (a)                                                                               1,082
  Class A exchange (b)                                                                              (130,420)
  Goodwill - Minority interest (c)                                                                    20,759
                                                    --------         --------       --------        --------
Stockholders' Deficit - September 30, 1997                --           (1,676)            --          (3,097)


  Net income                                                                                           3,090
  Change in cumulative foreign
     translation adjustment, net of tax                                  (614)                          (614)
  Adjustment to cash distributions
     declared to partners                                                                                772
  Dividends declared on common stock                      --                                            (642)
                                                    --------         --------       --------        --------
Stockholders' Deficit - December 31, 1997                 --           (2,290)            --            (491)
                                                                                                    --------

  Net income                                                                                          13,817
  Change in cumulative foreign translation
     adjustment, net of tax                                            (2,306)                        (2,306)
                                                                                                    --------
  Comprehensive income                                                                                11,511
  Issuance of 796,408 shares of common stock                                                        --------
     in public offering                                                                               20,814
  Issuance of 1,988 shares of common stock
     to certain non-employee directors                                                                    39
  Dividends declared on common stock                                                                  (2,804)
  Stock options granted at a discount                   (229)                                             25
  Repurchase of 461,100 shares of common stock                                        (8,380)         (8,380)
                                                    --------         --------       --------        --------
Stockholders' Equity - December 31, 1998            $   (229)        $ (4,596)      $ (8,380)       $ 20,714

  Net loss                                                                                           (37,371)
  Change in cumulative foreign translation
     adjustment, net of tax                                               252                            252
                                                                                                    --------
  Comprehensive income                                                                               (37,119)
                                                                                                    --------
  Issuance of 11,293 shares of common stock
     to certain non-employee directors                                                                   119
  Dividends declared on common stock                                                                    (674)
  Repurchase of 18,000 shares of common stock                                           (325)           (325)
  Stock options granted at a discount                   (124)                                             --
  Amortization of stock option discount                   70                                              70
                                                    --------         --------       --------        --------
Stockholders' Deficit - December 31, 1999           $   (283)        $ (4,344)      $ (8,705)       $(17,215)
                                                    ========         ========       ========        ========

</TABLE>
<PAGE>


(a)  Minority ownership included as other liabilities by the Partnership.

(b)  Each Class A limited partnership interest was exchanged for $1.30 in cash
     plus 0.38 share of Trust Preferred Securities recorded at fair value based
     on the price of the Class A interests upon close of trading on the New York
     Stock Exchange on September 30, 1997 of $11.75. This fair value of $115,991
     is recorded by the Company as Guaranteed Preferred Beneficial Interests in
     the Company's Junior Subordinated Debentures.

(c)  Goodwill related to the exchange of the GP minority interest (See Note 1).

(d)  Cumulative foreign translation adjustment represents the only item of other
     comprehensive income.

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       35


<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (dollars in thousands, except per share amounts)







1.  Basis of Presentation:

The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Company" or "SunSource") and its direct and indirect
wholly-owned subsidiaries including SunSource Capital Trust (the "Trust"). For
1998 and prior periods, the accompanying financial statements include the
consolidated accounts of the Company, its predecessor, SunSource L.P. (the
"Partnership"), and its wholly-owned subsidiaries including SDI Operating
Partners, L.P. (the "Operating Partnership") and SunSource Capital Trust (the
"Trust"). All significant inter-company balances and transactions have been
eliminated.

Effective with the close of business on December 31, 1998, the Company
reorganized the Operating Partnership by contributing its assets and liabilities
to newly-formed, indirect, wholly-owned corporate subsidiaries organized
according to the Company's current operating structure (the "Reorganization").
As a result of the Reorganization, the Operating Partnership and its general
partner, SDI Partners I, L.P.(the "G.P.") cease to exist. In connection with the
Reorganization, the Company amended its debt financing agreements (see Notes 9
and 10).

Nature of Operations:

The Company is one of the leading providers of value-added services and products
to retail and industrial markets in North America. The Company operates in four
segments: (1) Technology Services, operating as SunSource Technology Services
Company, Inc. ("STS"); (2) Hardware Merchandising, operating as The Hillman
Group, Inc. ("Hillman") (3) Expediter, operating as Kar Products, Inc. and A & H
Bolt & Nut Company Limited (collectively, "Kar" or "Kar Products"); and (4)
Integrated Supply. In December 1999, the Company's Board of Directors approved
management's plan to dispose of the Company's Glass Merchandising segment,
operating as Harding Glass, Inc. ("Harding"). Accordingly, Harding has been
accounted for as a discontinued operation and its results of operations were
segregated from results of the Company's continuing operations including
restatement of the prior periods presented.

STS offers a full range of technology-based products and services to small,
medium and large manufacturers. Hillman provides small hardware-related items
and merchandising services to retail outlets, primarily hardware stores, home
centers and lumberyards. Kar Products provides personalized, small parts
inventory management services to low volume customers. Integrated Supply
provides major industrial manufacturing customers with comprehensive inventory
management services for their maintenance, repair and operating supplies.

Harding sells retail and wholesale automotive and flat glass and provides auto
glass installation and small contract glazing services to individual consumers,
insurance companies, auto body shops, and other customers through a large
network of retail glass shops.

STS, Hillman, Kar and Integrated Supply accounted for 44%, 27%, 23% and 6%,
respectively, of the Company's consolidated 1999 net sales. On a consolidated
basis, the Company has over 110,000 customers, the largest of which accounted
for less than 9% of net sales. The Company's foreign sales in Canada and Mexico


                                       36

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)




1.  Basis of Presentation, continued:

accounted for less than 10% of its consolidated 1999 net sales. The average
single sale was less than three hundred dollars. Sales performance is tied
closely to the overall performance of the non-defense-goods producing sector of
Gross Domestic Product in the United States.

Discontinued Operations:

In December 1999, the Company's Board of Directors approved management's plan to
dispose of the Company's Harding business. Accordingly, Harding has been
accounted for as a discontinued operation and its results of operations were
segregated from results of the Company's ongoing businesses including
restatement of the prior periods presented. In January 2000, the Company
announced that it had signed a letter of intent to sell Harding.

The estimated loss recorded during the year ended December 31, 1999 on the sale
of Harding was $23.8 million.

Following is summary financial information for the Company's discontinued Glass
Merchandising segment:

<TABLE>
<CAPTION>
                                                         1999                   1998              1997
--------------------------------------------------------------------------------------------------------
<S>                                                  <C>                      <C>               <C>
Net Sales                                            $ 118,282                $94,952           $88,258
--------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations:
   Before income taxes                                 $(3,268)               $ 3,522           $ 1,695
   Income tax provision (benefit)                       (1,080)                 1,562                 5
--------------------------------------------------------------------------------------------------------
   Net                                                  (2,188)                 1,960             1,690

Estimated loss on disposal                             (23,834)                    --                --
--------------------------------------------------------------------------------------------------------
Total income (loss) from
   discontinued operations                            $(26,022)               $ 1,960           $ 1,690
========================================================================================================
</TABLE>

As of December 31, 1999, net assets held for sale of the discontinued Harding
operation were $35,249 consisting of receivables, inventories, prepaid assets,
property and equipment and intangible assets, less an allowance for the
estimated loss on disposal and current liabilities.

Conversion to Corporate Form

On September 25, 1997, the limited partners of the Partnership approved the
conversion of the Partnership to a corporation effective at the close of
business on September 30, 1997 (the "Conversion"). In connection with the
Conversion, the Company refinanced all of its outstanding bank revolving credit
and senior note debt (the "Refinancing"). As a result of the Conversion, the
Class A limited partnership interests in the Partnership were converted into
cash and Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures (the "Trust Preferred Securities", which were issued by
the Trust), and the Class B limited partnership interests in the Partnership
were converted into common stock of the Company and the general and limited
partnership interests in the GP, which was also the general partner of the
Partnership, were exchanged with the Company for 1,000,000 shares of its common
stock.


                                       37

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)


1.  Basis of Presentation, continued:

The exchange represented by the GP's 1% ownership interest in the Company was
subject to purchase accounting in accordance with Accounting Principles Bulletin
("APB") No. 16 and resulted in the Company recording goodwill in the amount of
$20,759 at September 30, 1997. The Company incurred transaction and other costs
related to the Conversion of $5,171, of which $4,668 represents transaction
costs and $503 a charge for deferred compensation accelerated as a result of the
Conversion. Of these costs, $3,053 was charged to operations in 1997. Cash
payments for transaction costs in 1998 and 1997 were $238 and $2,698,
respectively.

1996 Restructuring Charges:

In December 1996, the Company recorded a provision for restructuring charges in
the amount of $5,950 for Technology Services and Harding in accordance with the
provisions of Emerging Issues Task Force ("EITF") Abstract 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." Restructuring charges for Technology Services in the amount of $4,400
included termination benefits for approximately 175 employees and other exit
costs. Restructuring charges for Harding in the amount of $1,550 represent
primarily the write-off of assets in connection with the Company's decision to
withdraw from certain geographic markets which was completed in 1997. The
following table summarizes activity in the restructuring liability for
Technology Services by balance sheet classification for the twelve months ended
December 31, 1999:

<TABLE>
<CAPTION>
                                          Termination          Other
                                            Benefits        Exit Costs         Total
                                          -----------       ----------        --------
<S>                                           <C>                <C>            <C>
Current - other accrued expenses:
Balance at December 31, 1998:             $      799      $     499         $  1,298
  Reduction for payments/adjustments            (949)          (599)          (1,548)
  Reclassified from long-term                    150            100              250
                                          -----------       --------          -------
Balance at December 31, 1999:             $      -0-        $   -0-         $    -0-
                                          ===========       ========          =======

Long-term - other liabilities:
Balance at December 31, 1998:             $      150        $   100         $    250
  Long-term - reclassified to current           (150)          (100)            (250)
                                          ----------        --------        ---------
Balance at December 31, 1999:             $      -0-        $   -0-         $    -0-
                                          ==========        ========        =========
</TABLE>

Termination payments to-date represent severance payments and other support
costs for 176 employees. Other exit costs include legal and consulting costs to
execute termination activities and facility shut-down costs.

1999 Restructuring Charges and Asset Write-downs

On June 29, 1999, the Board of Directors of SunSource Inc. approved the
Company=s restructuring plan to reposition Technology Services and Kar Products,
write-down key machines at the Hillman division, and realign corporate overhead
expenses. As a result of this plan, the Company recorded a restructuring charge
of $4,818, a key machine write-down of $3,300 and an inventory write-down
related to restructuring of $2,130. Included in these charges and write-downs is
$5,392 related to Technology Services, $1,020 related to Kar Products, $3,300
related to Hillman, and $536 related to Corporate Headquarters.





                                       38

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)


1.  Basis of Presentation, continued:

1999 Restructuring Charges and Asset Write-downs, continued

The Technology Services charge of $5,392 includes termination benefits of
$2,744, an inventory write-down of $2,130, other exit costs of $415 and a
write-down of unamortized leasehold improvements of $103. The termination
benefits of $2,744 cover approximately 94 employees. The other exit costs and
write-down of unamortized leasehold improvements are related to lease buyouts
and losses on the sale of owned facilities as a result of Technology Services'
facilities consolidation. The inventory write-down of $2,130 is the result of a
reduction in vendor lines resulting principally from the facility consolidation
process.

The Kar Products charge of $1,020 is comprised solely of termination benefits
for about 10 employees.

The Hillman charge of $3,300 is primarily the result of Hillman=s inability to
recover key machines from retailers. The $3,300 charge represents the total net
book value of key machines that had been capitalized as of June 30, 1999.

The Corporate Headquarters component of the restructuring charge aggregates $536
comprised of other exit costs of $434 and termination benefits of $102 for two
employees. The other exit costs include lease termination costs of $101 and
unamortized leasehold improvements of $333 on certain assets.







                                       39

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)


1.  Basis of Presentation, continued:

The following table summarizes the restructuring costs and asset write-downs
charged, the balance sheet classification, and payments or adjustments made
during 1999.

<TABLE>
<CAPTION>
                                                               Termina-     Other
                                                   Asset         tion        Exit
                                               Write-Downs     Benefits     Costs      Total
                                               -----------     --------    -------    -------
<S>                                                   <C>          <C>         <C>      <C>
Balance Sheet Classification
Opening Balance June 29, 1999:
Inventory Write-down                            $  2,130            --         --    $ 2,130
Unamortized Key Machines                           3,300            --         --      3,300
Unamortized leasehold
improvements                                         436            --         --        436
Current - other accrued expense                       --       $ 3,096      $ 435      3,531
Long-term - other liabilities                         --           770         81        851
                                                --------       -------    -------    -------
     Totals                                     $  5,866       $ 3,866      $ 516    $10,248
                                                --------       -------    -------    -------

Payments/charges during year-
ended December 31, 1999:
Inventory write-down                            $ (2,130)           --         --    $(2,130)
Unamortized Key Machines                        $ (3,300)           --         --    $(3,300)
Unamortized leasehold
improvements                                        (436)           --         --    $  (436)
Current-other accrued expense
payments                                              --        (1,650)      (405)    (2,055)
Current - other accrued expense
(reclassified from long-term -
other liabilities                                     --           276         81        357
Long-Term - other liabilities
(reclassified to current - other
accrued expense)                                      --          (276)       (81)      (357)
                                                --------       -------    -------    -------

     Totals                                     $ (5,866)      $(1,650)     $(405)   $(7,921)
                                                --------       -------    -------    -------

Ending Balance Dec. 31, 1999:
Inventory Write-down                            $     --            --         --         --
Unamortized key machines                              --            --         --         --
Unamortized leasehold
improvements                                          --            --                    --
Current - other accrued expense                       --         1,722        111      1,833
Long-term - other liabilities                         --           494         --    $   494
                                                --------       -------    -------    -------

     Totals                                     $     --       $ 2,216    $   111    $ 2,327
                                                ========       =======    =======    =======
</TABLE>

The Board's approval of the restructuring plan provided the Company's management
with the authority to involuntarily terminate employees. The Company established
the levels of benefits that the terminated employees received and informed the
employees of their termination benefits prior to the close of business on June
30, 1999. Termination payments to date represent severance payments for
approximately 106 employees. Three employees have termination agreements that
provide severance payments for a period that is more than 12 months beyond
December 31, 1999. The $494 balance in long-term other liabilities represents
the remaining payments for these employees.



                                       40

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)

2.  Summary of Significant Accounting Policies:

         Cash Equivalents:

Cash equivalents consist of commercial paper, U.S. Treasury obligations and
other liquid securities purchased with initial maturities less than 90 days and
are stated at cost which approximates market value.

         Inventories:

Inventories, which consist of products purchased for resale, are valued at the
lower of cost or market, cost being determined principally on the first-in,
first-out method.

         Property and Equipment:

Property and equipment, including assets acquired under capital leases, is
carried at cost and includes expenditures for new facilities and major renewals.
Maintenance and repairs are charged to expense as incurred. When assets are
sold, or otherwise disposed of, the cost and related accumulated depreciation
are removed from their respective accounts, and the resulting gain or loss is
reflected in current operations.

         Depreciation:

For financial accounting purposes, depreciation, including that related to plant
and equipment acquired under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets, generally three to
twenty-five years, or, if shorter, over the terms of the related leases.

         Goodwill and Other Intangible Assets:

Goodwill related to the excess of acquisition cost over the fair value of net
assets acquired and the goodwill associated with the GP Exchange discussed in
Note 1 is amortized on a straight-line basis over forty years. Other intangible
assets arising principally from acquisitions are amortized on a straight-line
basis over periods ranging from three to ten years.

         Long-Lived Assets:

Under the provisions of Statement of Financial Accounting Standard ("SFAS") 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company has evaluated its long-lived assets and certain
identifiable intangibles including goodwill for financial impairment, and will
continue to evaluate them, based on the estimated undiscounted future cash
flows, as events or changes in circumstances indicate that the carrying amount
of such assets may not be fully recoverable. See Note 1, "Restructuring Charges"
for information on the write-down of assets related to Hillman's inability to
recover key machines from retailers in 1999.

         Income Taxes:

Deferred income taxes are computed using the liability method. Under this
method, deferred income tax assets and liabilities are determined based on
differences




                                       41

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)

2.  Summary of Significant Accounting Policies, continued:

between financial reporting and tax bases of assets and liabilities (temporary
differences) and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. As a result of the
Conversion, the Company recognized additional deferred income tax benefits which
were not previously available to the Partnership due to its partnership status.

         Retirement Benefits:

Certain employees are covered under profit-sharing retirement plans ("defined
contribution plans") for which contributions are determined on an annual basis
in accordance with the requirements of each plan. Defined benefit plan
contributions covering certain employees are funded, at a minimum, in accordance
with the requirements of the Employee Retirement Income Security Act of 1974, as
amended.

In accordance with collective bargaining agreements, annual contributions to
multi-employer pension plans are made. These contributions, which are based on
fixed contributions per month for each hour worked, are charged to income as
incurred.

Certain employees are covered under post-retirement benefit plans for which
benefits are determined in accordance with the requirements of each plan.

         Revenue Recognition:

Revenue from sales of products is recorded upon the passing of title which
usually occurs upon the shipment of goods.

         Fair Value of Financial Instruments:

Cash, accounts receivable, short-term borrowings, accounts payable, accrued
liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value due to short-term maturity or revolving
nature of these instruments. The fair values of the Company's debt instruments
are disclosed in Note 10. The fair value of the Trust Preferred Securities are
disclosed in Note 13.

         Translation of Foreign Currencies:

The translation of applicable foreign-currency-based financial statements into
U.S. dollars is performed for balance sheet accounts using exchange rates in
effect at the balance sheet date and for revenue and expense accounts using an
average exchange rate during the period.

Exchange adjustments resulting from foreign currency transactions are recognized
in net income and were immaterial for the three years ended December 31, 1999.

         Use of Estimates in the Preparation of Financial Statements:

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.


                                       42

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)




3.  Acquisitions:

During 1998, Hillman acquired the assets of three companies which supply keys,
letters, numbers and signs and other products to retail hardware stores, which
were integrated into its existing operations. Net cash consideration paid for
the acquired businesses, including transaction costs, was $10,839, including
goodwill of $7,009, and the assumption of certain liabilities of $1,132.

These acquisitions have been accounted for as purchases and, accordingly, the
results of operations have been included in the accompanying consolidated
financial statements from the date of acquisition. The following amounts
represent the pro forma financial results for the year ended December 31, 1998
had these acquisitions been consummated on January 1, 1998:

                  Net sales                                     $618,498
                  Income before extraordinary items               13,849
                  Net income                                      13,849
                  Basic and diluted earnings per share             $2.00


4.  Related Party Transactions:

Previously under partnership form, the GP earned a management fee annually from
the Operating Partnership equal to 3% of the aggregate initial capital
investment of the holders of Class A interests. Management fees earned in 1997
were $2,491. The 1997 management fee was pro-rated through the Conversion and
paid in full on September 30, 1997.

From January 1, 1997 through September 30, 1998, a member of the Company's Board
of Directors was a partner in a law firm which represents the Company in various
matters and with which the Company had a leasing arrangement for office space
during 1996 and through September 1997. Payments to this law firm were $389 and
$811 in 1998 and 1997, respectively. Amounts payable to this law firm were $109
and $10 at December 31, 1998 and 1997, respectively.

An affiliate of a firm which owned beneficially more than 5% of the Company's
Common Shares during 1998 performed investment banking services for the Company
in 1998. Payments for these services were $361 in 1998.

A member of the Company's Board of Directors is an officer of a firm which
performed investment banking services for the Company in 1998. Payments for
these services were $361 in 1998.





                                       43

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)


5.  Income Taxes:

The total income tax provision (benefit) was allocated for the three years ended
December 31, of 1999 as follows:

                                              1999          1998          1997
                                           ---------      -------      --------

Continuing operations                      $(10,100)      $ 6,762      $(6,685)
Discontinued operations                      (1,080)        1,562            5
Extraordinary item--early
  extinguishment of debt                        126                        951
                                           ---------      --------     -------
Total tax provision (benefit)              $(11,054)      $ 8,324      $(5,729)
                                           =========      ========     ========

The components of the Company's provision (benefit) for income taxes from
continuing operations are as follows for the three years ended December 31,
1999, as follows:

                                              1999          1998          1997
                                           ---------      -------      --------

  Current:
   Federal & State                         $( 7,318)     $ 3,600       $ 1,222
   Foreign                                      413        1,505         1,005
                                           ---------      -------      -------
     Total current                           (6,905)       5,105         2,227
                                           ---------      -------      -------
  Deferred:
   Federal & State                           (3,404)       1,822       $   225
   Foreign                                      209         (165)          428
                                           ---------      -------      -------
     Total deferred                          (3,195)       1,657           653
                                           ---------      -------      -------

  Deferred tax benefit upon conversion           --           --        (9,565)
                                           ---------      -------      -------

     Provision (benefit) for income taxes  $(10,100)     $ 6,762       $(6,685)
                                           =========      =======      ========


As of December 31, 1999, the Company had approximately $23,000 of capital loss
carryforwards available to reduce future capital gains in the U.S. The capital
loss carryforwards are primarily a result of losses on the divestiture of
Harding Glass, Inc. and losses on the sale of certain assets of the SIMCO OEM
business. The capital loss carryforwards expire in 2004. A valuation allowance
has been provided for the full value of the deferred tax asset related to these
carryforwards as of December 31, 1998.

The Company has net operating loss ("NOL") carryforward, for tax purposes,
totaling $8,900 as of December 31, 1999, that is available to offset future
taxable income. This carryforward expires in 2014. The Company has provided a
valuation allowance totaling $2,700 to reduce this loss carryforward.

Upon the Conversion, the Company recorded additional deferred tax assets of
$9,565 not previously available under partnership form.

Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of the assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.





                                       44

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)

5.  Income Taxes, continued:

The table below reflects the significant components of the Company's net
deferred tax assets at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                        1999                                           1998
                                      ------------------------------------             ---------------------------------
Deferred tax assets:                   Current       Non-Current   Total               Current     Non-Current    Total
                                      --------      ------------  --------             -------      -----------  -------
<S>                                   <C>           <C>           <C>                  <C>          <C>          <C>
  Inventory                           $ 5,441       $    --       $ 5,441              $ 4,106      $    --      $ 4,106
  Accruals and reserves                 3,643         5,674         9,317                4,425        4,575        9,000
  Capital loss carryforwards            6,857            --         6,857                   --           --
  Net operating loss carryforward       3,108            --         3,108                   --           --           --
  Depreciation and amortization            --         1,402         1,402                   --        1,362        1,362
  Other                                  (451)           --          (451)                 512           --          512
                                      -------       -------       -------              -------       ------      -------
Total gross deferred assets            18,598         7,076        25,674                9,043        5,937       14,980
Less: valuation allowance - related
 to capital loss carryforwards         (6,857)           --        (6,857)                  --           --           --
Less: valuation allowance - general    (1,523)       (1,211)       (2,734)                  --       (1,656)      (1,656)
                                      -------       -------       -------              -------       ------      -------
Net deferred assets                   $10,218       $ 5,865       $16,083              $ 9,043      $ 4,281      $13,324
                                      =======       =======       =======              =======      =======      =======
</TABLE>

Realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to their expiration. Although realization is not assured,
management believes it is more likely than not that the net deferred tax asset
will be realized. The amount of the net deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.

Below is a reconciliation of statutory federal income tax rates to the effective
tax rates for the twelve months ended December 31, 1999 and December 31, 1998
and the three months ended December 31, 1997:

                                          12 Months       12 Months     3 Months
                                            Ended           Ended         Ended
                                          12/31/99        12/31/98      12/31/97
                                          ---------       ---------     --------
Statutory federal income tax rate          (35.0%)         35.0%          35.0%
Foreign income tax rates in excess of
 U.S. federal income tax rates               0.4%           2.2%           9.1%
State and local income taxes, net of
 U.S. federal income tax benefit            (8.3%)          3.4%           4.2%
Non-deductible expenses                     (4.7%)          5.1%           5.2%
Tax benefits associated with the
 conversion, net                               --          (9.4%)           --
Recognition of deferred tax benefits
 relating to cumulative temporary
 differences                                   --            --          (10.5%)
                                           ------          -----         ------
Effective income tax rate                  (47.6%)         36.3%          43.0%
                                           ======          =====         ======

6.  Extraordinary Losses:

In 1999, in connection with the early extinguishment of debt, the Company wrote
off capitalized financing costs of $361 and recorded an extraordinary loss of
$235 (net of deferred tax benefits of $126). (See Note 9.)

In 1997 the Company paid prepayment penalties of $4,343 and recorded an
extraordinary loss of $3,392 (net of deferred tax benefits of $951) due to the
early extinguishment of all of the Company's previously outstanding Senior
Notes.



                                       45

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)

7.   Property and Equipment:

Property and equipment consist of the following at December 31, 1999 and 1998:

                                                                   Estimated
                                                                  December 31,
                                               Useful Life   -------------------
                                                 (Years)      1999        1998
                                               -----------   -------     -------
     Land                                           N/A      $   853     $ 1,797
     Buildings and leasehold improvements          10-30       7,406      10,875
     Machinery and equipment                        3-10      21,857      23,845
     Furniture and fixtures                          3-5      10,038       9,967
                                                             -------     -------
                                                              40,154      46,484
     Less accumulated depreciation                            22,872      24,740
                                                             -------     -------
                                                             $17,282     $21,744
                                                             =======     =======


8.   Notes Payable:

Notes payable consisted of casualty insurance financing of $376 at December 31,
1999 and $796 at December 31, 1998. The interest rate on the outstanding notes
payable borrowings at December 31, 1999 and 1998 was 6.18% and 5.72%,
respectively.


9.   Revolving Credit Line:

On December 15, 1999, the Company refinanced its $60,000 senior notes and
$90,000 bank revolving credit with $155,000 in senior secured credit facilities
(the "Refinancing") consisting of $130,000 in revolving bank credit (the
"Revolver") and a $25,000 term loan (the "Term Loan", see Note 10). The new
credit agreement has a five-year term (the "Credit Agreement") whose Revolver
availability is based on the Company's receivables and inventory balances (the
"Borrowing Base") evaluated on a monthly basis. The Company and its domestic and
foreign corporate subsidiaries are borrowers and guarantors ("Credit Parties")
under the Credit Agreement. Each credit party assigned, pledged and granted a
security interest in and to all its assets as collateral. The Credit Agreement
provides borrowings at interest rates based on the London Interbank Offered
Rates ("LIBOR") plus a margin of between 2.50% and 3.00% (the "LIBOR Margin") in
accordance with certain leverage ratios as stated in the Credit Agreement, or
prime. Letters of Credit commitment fees are based on the average daily face
amount of each outstanding Letter of Credit multiplied by one and one half
percent (1.50%) per annum.

As of December 31, 1999, the Company's Borrowing Base was $117,049 consisting of
receivables and inventory balances totaling $122,254 less letter of credit
commitments outstanding of $5,205. The Revolver balance was $102,791 as
reflected on the Company's consolidated balance sheet at December 31, 1999. As
of December 31, 1999, the Company had $14,089 available under the revolver.
Amounts outstanding under the Credit Agreement are due upon its termination on
December 14, 2004.

The Credit Agreement, among other provisions, contains financial covenants
requiring the maintenance of specific coverage ratios, levels of undrawn
availability and restricts the incurrence of additional debt and the sale of
assets. If the Company sells any assets other than inventory, it must repay the
advances under the Credit Agreement in an amount equal to the net proceeds of
such sale. Such repayments shall be applied first to the outstanding principal
installments of the Term Loan (see Note 10) and second, to the remaining
advances in such order as the lenders may determine.


                                       46

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)


9.   Revolving Credit Line, continued

The Company has another credit facility available in the amount of $500 for
letters of credit of which no amount was outstanding at December 31, 1999. The
letters of credit commitments are issued at varying rates. This facility,
renewable annually, is not subject to compensating balance requirements or
unused commitment fees.

An indirect, wholly-owned Canadian subsidiary of the Company has a $2,500
Canadian dollar line of credit with a local lender for working capital purposes
of which no amount was outstanding at December 31, 1999. This facility, which is
renewable annually, provides bank borrowings at an interest rate of prime plus
1/4 of 1%.

On September 30, 1997, the Operating Partnership entered into a five-year bank
credit agreement which was amended and restated as of December 31, 1998, in
connection with the Reorganization (the "Former Credit Agreement"). The Company
and its newly formed domestic corporate subsidiaries were co-borrowers under the
Former Credit Agreement. The Former Credit Agreement provided borrowings on a
revolving credit basis at interest rates based on LIBOR plus a margin of between
1.00% and 1.50% (the "Former LIBOR Margin") in accordance with certain leverage
ratios as stated in the Former Credit Agreement, or prime. Letters of credit
commitment fees were based on the Former LIBOR Margin when issued.

As of December 31, 1999, the LIBOR rate was 5.82%, the LIBOR Margin was 3.00%
and the prime rate was 8.50%. The Company's weighted-average interest rate for
borrowings under its revolving credit facilities was 7.11%, 7.05% and 7.79% for
the years ended December 31, 1999, 1998 and 1997, respectively.


10.   Long-Term Debt:

On December 15, 1999, the Company as part of the Credit Agreement entered into a
five-year $25,000 Term Loan. Upon closing of the Credit Agreement, the Company
made a principal payment of $3,500 on the Term Loan. The Term Loan is
collateralized in accordance with the provisions of the Credit Agreement (See
Note 9). The Term Loan provides borrowings at interest rates based on LIBOR plus
the LIBOR Margin in accordance with certain leverage ratios as stated in the
Credit Agreement, or prime.

As of December 31, 1999, the Company's weighted-average interest rate for the
Term Loan was 8.50%. Interest is required to be paid monthly on the daily
outstanding principal of the Term Loan. Principal payments of $1,250 are
required to be paid quarterly commencing on April 1, 2000, until the Term Loan
is repaid in full.

On September 30, 1997, the Company issued $60,000 of senior notes through a
private placement with an institutional investor. The senior notes were due on
September 30, 2002 and issued at a fixed rate of 7.66%. A surcharge rate of
7.91% was in effect from September 30, 1997 through the date of Refinancing as
provided in the noteholder agreement (the "Noteholder Agreement").

In connection with the Reorganization, the Noteholder Agreement was amended and
restated (the "Amended Noteholder Agreement"). The Company and its newly formed
domestic corporate subsidiaries were co-obligors under the Amended Noteholder
Agreement. Interest was required to be paid quarterly on March 30, June 30,
September


                                       47

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)




10.   Long-Term Debt, continued:

30 and December 30 on the outstanding principal of the senior notes. Optional
prepayments, in multiples of $100, could be made at anytime, as a whole or in
part, with accrued interest thereon plus a penalty, if any, as defined in the
Amended Noteholder Agreement.

As of December 31, 1999, the estimated fair value of the Company's Term Loan is
approximately $18,000 as determined in accordance with SFAS 107. The Company
discounted the future cash flows of its Term Loan based on borrowing rates for
debt with similar terms and remaining maturities. The fair value estimate is
made at a specific point in time and is subjective in nature and involves
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimate.

11.  Leases:

Certain warehouse and office space and equipment are leased under capital and
operating leases with terms in excess of one year. Future minimum lease payments
under noncancellable leases consisted of the following at December 31, 1999:

                                                      Capital          Operating
                                                      Leases            Leases
                                                      -------          ---------
   2000                                               $1,172            $10,383
   2001                                                1,024              7,692
   2002                                                  501              4,765
   2003                                                  106              4,031
   2004                                                   30              3,353
   Later years                                            --              9,849
                                                      ------            -------
     Total minimum lease payments                     $2,833            $40,073
                                                                        =======
   Less amounts representing interest                   (401)
                                                      ------
     Present value of Net Minimum Lease payments
     (including $923 currently payable)               $2,432
                                                      ======

Total rental expenses for all operating leases from continuing operations
amounted to $12,604 in 1999, $11,101 in 1998, and $11,881 in 1997.

12.  Deferred Compensation Plans:

The Company has adopted several deferred compensation plans since 1979, whereby
certain officers and employees earned performance-based compensation, payment of
which was deferred until future periods.

The Company also adopted the Deferred Compensation Plan for Key Employees of SDI
Operating Partners, L.P. (the "Key Employees Plan") on January 1, 1996 to allow
participants eligible for accelerated payments under the change in control
provisions of the other deferred compensation plans an election to continue to
defer their balances. A change of control occurred on September 30, 1997 as a
result of the Conversion whereby all awards earned through December 31, 1996
became fully vested and eligible for distribution. However, certain employees
elected to continue to defer their awards under the Key Employees Plan. Upon
approval of the SunSource Inc. 1998 Equity Compensation Plan (the "Equity
Compensation Plan") by shareholders of the Company on April 28, 1998, awards
under the other deferred compensation plans ceased


                                       48

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)




12.  Deferred Compensation Plans, continued:

as of December 31, 1997. The Equity Compensation Plan replaces the former cash
basis deferred compensation plan awards with stock options.

Effective October 1, 1998, the provisions of the Key Employees Plan which also
provide eligible employees of the Company the opportunity to defer receipt of
all or a portion of their salary and bonuses were amended to facilitate such
deferrals. The plan, as amended and restated, has been renamed the SunSource
Inc. Deferred Compensation Plan for Key Employees.

There were no amounts charged to income under the Company's deferred
compensation plans in 1999 and 1998. The amount charged to income in 1997 was
$3,152. The 1997 charge includes $503 which is classified in transaction and
other related costs on the accompanying statement of income for the year ended
December 31, 1997, since this charge would not have been incurred had the
Conversion not been consummated. During the three years ended December 31, 1999,
distributions from the deferred compensation plans aggregated $252 in 1999, $26
in 1998, and $2,876 in 1997. The Company's deferred compensation liabilities
amounted to $14,728 as of December 31, 1999 and $11,802 as of December 31, 1998.

The Company has established a Rabbi Trust (the "Rabbi Trust") to assist in
funding the liabilities of its deferred compensation plans. The Rabbi Trust
holds insurance policies purchased by the Company on the lives of certain
participants in the deferred compensation plans. The Rabbi Trust is the sole
beneficiary of these insurance policies of which the cash surrender value
aggregated $14,190 at December 31, 1999. Prior to a change in control and upon
direction from the Company in writing, the Rabbi Trust shall pay to the Company
all or a portion of the proceeds of any death benefits payable under any
insurance policy held by the Rabbi Trust in excess of any benefits payable under
the Company's deferred compensation plans with respect to the insured
participants.


13.  Guaranteed Preferred Beneficial Interests in the Company's Junior
     Subordinated Debentures:

In connection with the Conversion, Class A interests of the Partnership were
exchanged for Trust Preferred Securities of the Trust, as discussed in Note 1.
The Trust was organized in connection with the Conversion for the purpose of (a)
issuing its Trust Preferred Securities to the Company in consideration of the
deposit by the Company of Junior Subordinated Debentures in the Trust as trust
assets, and its Trust Common Securities to the Company in exchange for cash and
investing the proceeds thereof in an equivalent amount of Junior Subordinated
Debentures and (b) engaging in such other activities as are necessary or
incidental thereto.

The Trust had no operating history prior to the issuance of the Trust Preferred
Securities. The terms of the Junior Subordinated Debentures include those stated
in the Indenture (the "Indenture") between the Company and the indenture
trustee, and those made part of the Indenture by the Trust Indenture Act.

The Company has guaranteed on a subordinated basis the payment of distributions
on the Trust Preferred Securities and payments on liquidation of the Trust and

                                       49

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)

13.  Guaranteed Preferred Beneficial Interests in the Company's Junior
     Subordinated Debentures, continued:

redemption of Trust Preferred Securities (the "Preferred Securities Guarantee").
The sole assets of the Trust are the Junior Subordinated Debentures and the
obligations of the Company under the Indenture, the Preferred Securities
Guarantee and the Junior Subordinated Debentures in the aggregate constitute a
full and unconditional guarantee by the Company of the Trust's obligations under
the Trust Preferred Securities.

The Trust Preferred Securities have equity characteristics but creditor's rights
and are therefore classified between liabilities and stockholders' deficit on
the balance sheet. On September 30, 1997, the Trust Preferred Securities were
recorded at fair value of $115,991 based on the price of the Class A interests
of $11.75 upon close of trading on the New York Stock Exchange on that date. The
Trust Preferred Securities have a liquidation value of $25.00 per security. The
excess of fair value of the Trust Preferred Securities on September 30, 1997
over their liquidation value of $105,446, or $10,545 is amortized over the life
of the Trust Preferred Securities. The fair value of the Trust Preferred
Securities on December 31, 1999 was $51,141, based on the closing price on the
New York Stock Exchange of $12.125 per security on that date.

The interest payments on the Junior Subordinated Debentures underlying the Trust
Preferred Securities, aggregating $12,232 per year, are deductible for federal
income tax purposes under current law and will remain an obligation of the
Company until the Trust Preferred Securities are redeemed or upon their maturity
in 2027.

14.  Stockholders' Equity (Deficit):

     Treasury Stock

On August 6, 1998, the Company's Board of Directors authorized $15,000 for
management to repurchase up to 10% of the Company's outstanding common shares
through open market transactions and private block trades dependent upon market
conditions. The Company subsequently suspended the repurchase program on March
16, 1999. The Company has acquired and placed into treasury 479,100 common
shares through December 31, 1999, at an average cost of $18.17 per common share.

On January 22, 1998, the Company filed a registration statement on Form S-2 with
the United States Securities and Exchange Commission, which was amended
thereafter, for an offering of Common Shares of the Company (the "Offering").
The registration statement became effective on March 19, 1998 and the Offering
closed in its entirety on March 27, 1998. Of the 2,284,471 shares sold in the
Offering, 796,408 shares were issued and sold by the Company and 1,488,063
shares were sold by the selling stockholders, affiliates of Lehman Brothers Inc.
The Company received net cash proceeds of $20,813 from the 796,408 shares sold
in the Offering. The Company recorded an increase of $8 in Common Stock and
$20,805 in Additional Paid-in Capital.

     Common Shares Issued to Certain Non-Employee Directors

Under the Company's Stock Compensation Plan for Non-Employee Directors, certain
non-employee directors were issued 11,293 and 1,988 Common Shares for the years
ended December 31, 1999 and 1998, respectively. Under the terms of the plan,
non-employee directors are issued Common Shares on a quarterly basis to cover at
least 50% and up to 100% of their annual retainer fee. The number of shares to
be issued is dependent


                                       50

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)




14.  Stockholders' Equity (Deficit), continued:

upon the market price of the Common Shares, the number of directors receiving
shares, and the percentage of their annual retainer above 50% that each director
elects to receive in Common Shares. The Company recognized an expense of $119
and $39 with respect to the issuance of common shares to non-employee directors
in 1999 and 1998, respectively.

     Stock Options

On April 28, 1998, the Company adopted the Equity Compensation Plan (the
"Plan"), after approval by shareholders at the 1998 Annual Meeting. Grants under
the Plan may consist of options intended to qualify as incentive stock options
("ISO"), or non-qualified stock options that are not intended to so qualify
("NQSO"). In addition, grants may also consist of grants of restricted stock,
stock appreciation rights (SAR's), or performance units. The option price of any
ISO will not be less than the fair market value on the date the option is
granted (110% of fair value in certain instances). The option price of a NQSO
may be greater than, equal to, or less than the fair market value on the date
the option is granted (but not less than 85% of the fair market value). The
amount of options available for the Plan (the "Applicable Percentage") is
calculated annually and cumulatively at the rate of 5% of shares outstanding per
year. Prior to April 27, 1999, the maximum number of shares available under the
Plan was 25% of the total outstanding shares or 2,000,000 million Common Shares.
On April 27, 1999, the shareholders of the Company approved a proposal to amend
the 1998 Equity Compensation Plan to increase the aggregate number of shares
that may be issued or transferred under the Plan to 2,150,000 shares. However,
no more than the Applicable Percentage of the number of shares issued and
outstanding on the effective date of the Plan and at any time thereafter may be
issued or transferred under the Plan; provided however, that up to 150,000
shares may be issued under the Plan without reference to the Applicable
Percentage in connection with the hiring of a new chief executive officer of the
Company.

The Plan is administered by a committee of the Board of Directors. The Committee
determines the term of each option, provided, however, that the exercise period
may not exceed ten years from the date of grant, and for ISO's, in certain
instances, may not exceed five years. The options granted under the Plan vest
based on the results of financial performance. If threshold financial
performance targets are not met, 100% of the options vest on the ninth
anniversary of the grant. If threshold performance targets are met, stock
options become fully vested within 3 or 5 years from the date of grant,
depending on performance.






                                       51

<PAGE>


                        SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)

14.  Stockholders' Equity (Deficit), continued:

     Stock Options, continued

A summary of the Company's stock option plan for the twelve months ended
December 31, 1999 is presented below:

<TABLE>
<CAPTION>
                                                                             Weighted-                               Weighted-
                                                                              Average                                 Average
                                                           Number            Exercise              Number            Exercise
                                                             of                Price              Of Shares            Price
                                                           Options           Per Share           Exercisable         Per Share
                                                           -------           ---------           -----------         ---------
<S>                                                          <C>                <C>                  <C>                <C>
Outstanding at January 1, 1998                                  --                 --                    --            $   --
Granted                                                    211,495             $17.62                    --             17.62
Exercised                                                       --                 --                    --                --
Expired/Canceled                                                --                 --                    --                --
                                                           -------                                  -------
Outstanding at December 31, 1998                           211,495             $17.62                    --            $17.62
Granted                                                    562,000             $15.49               204,399            $16.20
Exercised                                                       --                  -                    --                 -
Expired/Canceled                                             4,000             $17.86                    --                 -
                                                           -------                                  -------
Outstanding at December 31, 1999                           769,495             $16.06               204,399            $16.20
                                                           =======                                  =======
</TABLE>

As of December 31, 1999, the 769,495 options outstanding under the Plan have
exercise prices between $12.75 and $18.88 and a weighted-average remaining
contractual life of 9.12 years.

During 1999 and 1998, the Company issued certain options at and below the fair
market price of the common stock on the grant date. For those options issued
with an exercise price equal to the fair market value, the weighted-average
exercise price was $15.79 and $18.82 and the average fair market value was
$16.00 and $18.84 in 1999 and 1998, respectively. For options issued with an
exercise price below fair market value for the stock on their grant date, the
weighted average exercise price was $12.75 and $15.99 and the average fair
market value was $15.00 and $18.81 in 1999 and 1998, respectively.

Compensation expense of approximately $378 is being recognized over vesting
periods for certain options which were granted at below fair market value in
1999 and 1998 of which $70 was recognized in 1999 and $25 was recognized in
1998. If compensation cost had been based on the fair value of the options at
the grant dates, consistent with the method required under SFAS 123, "Accounting
for Stock-Based Compensation", the Company's net income and net income per
Common Share would have been:

                                                          1999            1998
                                                       ---------        --------
   Net Income (Loss)                  As reported      $(37,371)        $ 13,817
                                      Pro forma        $(38,013)        $ 13,769

   Basic and diluted net income
      per common share                As reported      $  (5.54)        $   2.00
                                      Pro forma        $  (5.63)        $   1.99

The estimated weighted-average grant-date fair value of the options granted
during the year ended December 31, 1999 was $15.71 and the weighted-average
remaining contractual life of options outstanding at December 31, 1999 was 9.12
years.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1999 and 1998: expected volatility of 23.1% for
1999 and 28.7% for 1998;

                                       52

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)

14.  Stockholders' Equity (Deficit), continued:

     Stock Options, continued

risk free interest rates of 5.3% to 5.6% and expected lives of 5 and 9.5 years,
based on differing vesting schedules.

On April 27, 1999, a grant of 150,000 non-qualified stock options was made to
attract and retain a new Chief Executive Officer, (the "CEO Grant"). On January
26, 2000, the Compensation Committee of the Board of Directors amended the New
CEO Grant by reducing the number of shares from 150,000 to 50,000 and issued a
grant of 100,000 shares of restricted stock. One-third of the restricted shares
will vest six months from the date of grant. Vesting of the remaining two-thirds
of the restricted shares will be based on achievement of certain performance
goals. In the event that all or some of the performance goals are not achieved
within a three-year period from the date of grant, the then remaining shares
will vest on the third anniversary from their date of grant.

     Earnings Per Share

The Company computes earnings per share in accordance with SFAS 128, "Earnings
per Share". SFAS 128 requires the presentation of basic and diluted earnings per
share for companies with complex capital structures. As noted above under "Stock
Options", certain executives and key employees were granted a total of 769,495
options through December 31, 1999 to purchase the Company's Common Shares having
a potentially dilutive effect on earnings per share. Due to market conditions,
the shares granted under the Plan did not have a material dilutive effect on
earnings per share for the twelve months ended December 31, 1999 and 1998.

Due to the fact that the Company was not a corporation for the full year ended
December 31, 1997, a pro forma net income per Common Share has been presented
for the twelve months ended December 31, 1997. Pro forma net income per Common
Share assumes the Conversion and Refinancing occurred at the beginning of 1997
and accordingly excludes the extraordinary loss of $0.53 per Common Share. The
1997 pro forma earnings per share presented herein does not include the effect
of the Offering which increased the number of Common Shares outstanding and
provided cash which reduced the Company's bank revolving debt and interest
expense.

The number of outstanding Common Shares as of December 31, 1999 was 6,749,456.
The weighted average number of Common Shares outstanding for the twelve months
ended December 31, 1999 was 6,747,142, including shares issued to non-employee
directors, net of the 479,100 shares repurchased and held in treasury.

     Common Stock Dividend

On June 30, 1999, the Board of Directors of the Company suspended indefinitely
the quarterly cash dividend of $0.10 per Common Share.

15.  Allocation of Partnership Taxable Income:

Prior to the Conversion, for the shortened Partnership tax year from January 1,
1997 through September 30, 1997, the Partnership earned federal taxable income
of $0.5605 per Class B limited partnership interest. Under the Partnership
Agreement, holders of B interests were entitled to receive annual cash
distributions sufficient to cover their tax liabilities on taxable income
allocated to the B interests. For 1997 these cash distributions amounted to
$6,136 or $0.2775 per B interest.


                                       53

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)



16.  Retirement Benefits:

Certain of the Company's subsidiaries provide defined benefit pension plans and
post-retirement benefits to employees. The following provides a reconciliation
of benefit obligations, plan assets, and funded status of the plans:

<TABLE>
<CAPTION>
                                                  Pension Benefits                 Benefits
                                                ---------------------       ---------------------
Benefit Obligation:                              1999           1998          1999          1998
                                                -------       -------       -------       -------
<S>                                             <C>           <C>           <C>           <C>
Benefit obligation - beginning of year          $26,761       $23,961       $   951       $   524
Service cost                                        614         1,000            --            --
Interest cost                                     1,483         1,752            65            66
Plan participant contributions                      191            --            --            --
Amendments                                           --            --            --           421
Curtailment Gain                                 (5,329)           --            --            --
Actuarial (gain) loss                            (2,481)        1,777           (46)           19
Benefits paid                                    (1,512)       (1,729)          (90)          (79)
                                                --------      --------      --------      --------
Benefit obligation - end of year                $19,727       $26,761       $   880       $   951
                                                ========      ========      ========       =======
Fair Value of Plan Assets:
Fair value of plan assets - beginning of year   $31,475       $28,597       $    --       $    --
Actual return on plan assets                      3,690         4,432            --            --
Expenses                                           (178)          (24)           --            --
Employer contributions                               --            --            90            79
Plan participant contributions                      191           199            --            --
Benefits paid                                    (1,512)       (1,729)          (90)          (79)
                                                --------      --------      --------      --------
Fair value of plan assets - end of year         $33,666       $31,475       $    --       $    --
                                                ========      ========      ========       =======
Funded Status of Plans:
Funded status of the plans                      $13,939       $ 4,714       $  (880)      $  (951)
Unrecognized actuarial (gain) loss               (6,545)       (3,466)          (27)           19
Unrecognized prior service cost                      --          (279)          357           389
Unrecognized net transition asset                  (946)       (1,180)          454           489
                                                --------      --------      --------      --------
Accrued benefit cost
 recognized in the balance sheet                $ 6,448       $  (211)      $   (96)       $  (54)
                                                ========      ========      ========       =======
</TABLE>


                                       54

<PAGE>


                                  SUNSOURCE INC. AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                         (dollars in thousands, except per share amounts)


16.  Retirement Benefits, continued:

Net periodic pension costs include the following components:

<TABLE>
<CAPTION>
Net Periodic Pension Cost (Benefit):                                     1999             1998           1997
                                                                       --------         -------        -------
<S>                                                                    <C>              <C>            <C>
Service cost                                                           $   614          $ 1,000        $   920
Interest cost                                                            1,484            1,752          1,702
Expected return on plan assets                                          (2,985)          (2,727)        (3,160)
Amortization of net asset                                                 (234)            (234)          (234)
Amortization of prior service cost                                          --              (24)           (24)
Recognized net actuarial loss                                               70               52            769
                                                                       --------         --------       -------
         Net periodic pension cost (benefit)                           $(1,051)         $  (181)       $   (27)
                                                                       ========         ========       ========

Net post-retirement costs include the following components:

Net Periodic Post-retirement Cost:
Service cost                                                           $    --          $    --        $    32
Interest Cost                                                               65               66             --
Amortization of Transition obligation                                       35               35             --
Amortization of prior service cost                                          32               32             --
                                                                       --------         --------       -------
         Net post-retirement cost                                      $   132          $   133        $    32
                                                                       ========         ========       ========

Assumptions:                                                             1999             1998           1997
                                                                       --------         -------        -------
Discount rate                                                            8.00%            7.00%          7.25%
Rates of increase in compensation levels                                 6.50%            6.50%          6.50%
Expected long-term rate of return
  on plan assets                                                         9.75%            9.75%          9.75%
Health care cost trend rate on covered charges                           8.50%            8.50%          9.50%
</TABLE>

The health care cost trend rate, or the expected rate of increase in health-care
costs, is assumed to gradually decrease to 6.5% by 2004.

The impact of a 1% change in health care inflation on post-retirement benefits
is as follows:

<TABLE>
<CAPTION>
                                                                                Trend +1%         Trend -1%
                                                                                ---------         ---------
<S>                                                                               <C>               <C>
         December 31, 1999 projected benefit obligation                           $   74            $  (66)
         1999 service and interest cost                                           $    6            $   (5)
</TABLE>

Certain employees of the Company's Kar Products, Inc., SunSource Technology
Services Inc. and its divested operations are covered by defined benefit
retirement plans. Assets of the defined benefit plans consist of insurance
contracts and assets managed under a commingled trust agreement. The trust
assets are invested primarily in equity and fixed income holdings. Certain
employees of the Company's SunSource Technology Services Inc. subsidiary are
covered by post-retirement benefits.

In December 1999, the Board of Directors of the Company approved a proposal to
freeze the benefit accruals under the Technology Services defined benefit
retirement plan. As a result, the Company recorded a curtailment gain of $5,608
in accordance with Statement of Financial Accounting Standards No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits. The related deferred assets of
$5,608 associated with this curtailment is included in other assets on December
31, 1999.





                                       55

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)


16.  Retirement Benefits, continued:

Costs (income) charged to operations under all retirement benefit plans are as
follows:
                                                1999         1998         1997
                                              --------      ------       -------
         Defined contribution plans           $ 2,154       $3,052       $1,154
         Defined benefit plans                 (6,818)        (181)         (27)
                                              --------      ------       ------
                  Total                       $(4,664)      $2,871       $1,127
                                              ========      ======       ======


17.   Commitments and Contingencies:

Letters of credit are issued by the Company during the ordinary course of
business through major domestic banks as required by certain vendor contracts,
legal proceedings and acquisition activities. As of December 31, 1999, the
Company had outstanding letters of credit in the aggregate amount of $2,155
related to these activities.

As of December 31, 1999, the Company has guaranteed lease obligations of
approximately $520, principally relating to businesses previously divested. The
Company is not currently aware of any existing conditions which would cause a
financial loss related to these guarantees.

Under the Company's insurance programs, commercial umbrella coverage is obtained
for catastrophic exposure and aggregate losses in excess of normal claims.
Beginning in 1991, the Company has retained risk on certain expected losses from
both asserted and unasserted claims related to worker's compensation, general
liability and automobile as well as the health benefits of certain employees.
Provisions for losses expected under these programs are recorded based on an
analysis of historical insurance claim data and certain actuarial assumptions.
As of December 31, 1999, the Company has provided insurers letters of credit
aggregating $3,050 related to certain insurance programs.

Litigation originally instituted on February 27, 1996 is pending in the Court of
Common Pleas of Montgomery County, Pennsylvania in which Dorman Products of
America, Ltd. ("Dorman"), and its parent, R&B, Inc. ("R&B"), allege that
misrepresentations of certain facts were made by the Company, upon which R&B
allegedly based its offer to purchase the assets of the Dorman Products division
of the Company. Dorman and R&B seek damages of approximately $21,000.

Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Company's business. Those legal
proceedings incidental to the business of the Company are generally not covered
by insurance or other indemnity. In the opinion of management, the ultimate
resolution of the pending litigation matters will not have a material effect on
the consolidated financial position, operations or cash flows of the Company.




                                       56

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)



18.  Statements of Cash Flows:

Supplemental disclosures of cash flow information are presented below:

<TABLE>
<CAPTION>
                                                                 1999             1998              1997
                                                              ---------        ---------         -------
<S>                                                               <C>              <C>              <C>
Cash paid during the period for:
  Interest                                                    $   9,729        $   7,725         $   7,352
                                                              =========        =========         =========
  Income taxes                                                $   1,693        $   8,190         $   1,433
                                                              =========        =========         =========

Non-cash investing activities:
 Acquisitions (see Note 3):
   Fair value of assets acquired,
    including goodwill                                        $      --        $  11,971         $      --
   Less liabilities assumed                                          --            1,132                --
                                                              ----------       ---------         ---------
    Cash paid for acquired businesses                         $      --        $  10,839         $      --
                                                              ==========       =========         =========

Non-cash financing activities:
  Accrued and unpaid
   distributions on trust preferred
   securities, common shares and
   partnership interests                                      $   1,019        $     676         $   2,995
  Exchange of 11,099,573 Class A limited
   partnership interests for 4,217,837
   Trust Preferred Securities                                 $      --        $      --         $ 115,991
  Exchange of 21,675,246 Class B limited
   partnership interests for 5,418,936
   common shares                                              $      --        $      --         $  38,943
  Exchange of GP's Minority Interest for
   1,000,000 common shares                                    $      --        $      --         $  21,841

</TABLE>




                                       57

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)



19.  Quarterly Data (unaudited):

<TABLE>
<CAPTION>
    1999                                     Fourth        Third       Second       First
    ----                                    --------     --------     --------    --------
<S>                                         <C>          <C>          <C>         <C>
Net sales                                   $124,314     $138,238     $148,250    $144,850
Gross profit                                  49,162       56,444       59,960      61,557
Income (loss) from
 continuing operations                       (2,397)          (21)      (9,868)      1,172
Income (loss) from
 discontinued operations                     (26,015)          97          163        (267)
Extraordinary loss                              (235)          --           --          --
Net income (loss)                            (28,647)          76       (9,705)        905

Basic and diluted income
 (loss) per common share:
 Income (loss) from
  continuing operations                      $ (0.36)       $  --     $  (1.46)   $   0.17
 Income(loss) from dis-
  continued operations                       $ (3.85)       $0.01     $   0.02    $  (0.04)
 Extraordinary loss                          $ (0.03)       $  --     $     --    $     --
 Net income (loss)                           $ (4.24)       $0.01     $  (1.44)   $   0.13


    1998                                     Fourth        Third       Second       First
    ----                                    --------     --------     --------    --------
Net sales (1)                               $143,980     $157,852     $165,006    $150,680
Gross profit (1)                              62,408       65,444       65,601      59,729
Income (loss) from
 continuing operations                         2,759        3,556        3,830       1,712
Income (loss) from
 discontinued operations                         272          994          785         (91)
Net income (loss)                              3,031        4,550        3,330       1,621

Basic and diluted income
 (loss) per common share:
 Income (loss) from
  continuing operations                     $   0.40     $   0.50      $  0.53    $   0.26
 Income(loss) from dis-
  continued operations                      $   0.04     $   0.14      $  0.11    $  (0.01)
 Net income (loss)                          $   0.44     $   0.64      $  0.46    $   0.25

</TABLE>

(1)      Includes amounts reclassified to conform to current accounting.


20.  Concentration of Credit Risk:

Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with high credit
quality financial institutions. Concentrations of credit risk with respect to
sales and trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different industries and geographies. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral.




                                       58

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)

21.  Segment Information:

In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which replaces previous generally accepted
accounting principles on segment reporting. Adoption of SFAS 131 is required
beginning with 1998 reporting. Previously reported information has been restated
to conform to reporting under SFAS 131.

The Company has four reportable segments (see Note 1 "Nature of Operations")
which are disaggregated based on the products and services provided, markets
served, marketing strategies and delivery methods.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment sales are immaterial.
The Company measures segment profitability and allocates corporate resources
based on each segment's Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") which is defined as income from operations before
depreciation and amortization. The Company also measures the segments on
performance on their tangible asset base. The table below provides the Company's
segment disclosures and is followed by reconciliations of the segment amounts to
the consolidated amounts where appropriate:

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                             ---------------------------------------------
                                                                1999              1998              1997
                                                             ---------         ---------         ---------
<S>                                                             <C>               <C>                <C>
Net Sales
Technology Services (STS)                                    $ 242,643         $ 318,500         $ 318,984
Hardware Merchandising (Hillman)                               151,884           125,830           103,971
Expediter (Kar)                                                124,724           124,536           125,911
Integrated Supply                                               36,401            48,652            57,583
                                                             ---------         ---------         ---------
   Consolidated net sales                                    $ 555,652         $ 617,518         $ 606,449
                                                             =========         =========         =========

Gross Profit
Technology Services (STS)                                    $  52,987         $  85,215         $  84,826
Hardware Merchandising (Hillman)                                81,045            66,485            54,901
Expediter (Kar)                                                 86,204            88,175            90,171
Integrated Supply                                                6,887            13,307            14,739
                                                             ---------         ----------        ---------
          Segment gross profit                               $ 227,123         $ 253,182         $ 244,637
                                                             =========         =========         =========

EBITDA
Technology Services (STS)                                    $ (12,477)        $  15,138         $  16,072
Hardware Merchandising (Hillman)                                15,816            13,477            11,580
Expediter (Kar)                                                 18,965            21,196            21,583
Integrated Supply                                               (1,150)            2,505             3,590
                                                             ----------        ---------         ---------
   Segment profit                                            $  21,154         $  52,316         $  52,825
                                                             ==========        =========         =========

Tangible Assets
Technology Services (STS)                                    $  79,675         $  83,752         $  88,259
Hardware Merchandising (Hillman)                                56,963            59,487            40,579
Expediter (Kar)                                                 44,536            42,479            41,991
Integrated Supply                                                9,792            17,051            15,476
                                                             ---------         ---------         ---------
   Segment tangible assets                                   $ 190,966         $ 202,769         $ 186,305
                                                             =========         =========         =========

Capital Expenditures
Technology Services (STS)                                    $   1,026         $   2,051         $   2,034
Hardware Merchandising (Hillman)                                 2,271             2,072             1,497
Expediter (Kar)                                                  1,023             1,693               622
Integrated Supply                                                  252               216               277
                                                             ---------         ---------         ---------
   Segment capital expenditures                              $   4,572         $   6,032         $   4,430
                                                             =========         =========         =========
</TABLE>

                                       59

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)

21.  Segment Information, continued:

<TABLE>
<CAPTION>
<S>                                                               <C>              <C>               <C>
Depreciation
Technology Services (STS)                                    $   1,578         $   1,596         $   1,421
Hardware Merchandising (Hillman)                                 1,408             1,347               747
Expediter (Kar)                                                  1,060               981               886
Integrated Supply                                                  124               165               124
                                                             ---------         ---------         ---------
   Segment depreciation                                      $   4,170         $   4,089         $   3,178
                                                             =========         =========         =========

Geographic Segment Data:
Net Sales
United States                                                $ 508,835         $ 567,325         $ 552,617
Canada                                                          32,415            32,968            34,022
Mexico                                                          14,402            17,225            19,810
                                                             ---------         ---------         ---------
   Consolidated net sales                                    $ 555,652         $ 617,518         $ 606,449
                                                             =========         =========         =========

Reconciliation of Segment Profit to
 Income (loss) from continuing operations
 Before Income Taxes and
 Extraordinary Loss:
Segment profit - EBITDA from continuing
Operations                                                   $  21,154         $  52,316         $  52,825
Depreciation                                                    (4,272)           (4,192)           (3,279)
Amortization                                                    (1,847)           (1,670)           (1,370)
Corporate expenses                                              (9,653)           (7,165)           (7,961)
                                                             ----------        ----------        ----------
Income before non-recurring charges                              5,382            39,289            40,215
Non-recurring charges:
 Gain on Curtailment of Defined
   Benefit Plan                                                  5,608                --                --
 Restructuring Charges and Asset
   Write-off                                                   (10,248)               --                --
 Provision for litigation matters -
  divested operations                                               --            (1,600)               --
 Transaction and other costs                                        --                --            (3,053)
 Management fee                                                     --                --            (2,491)
 Minority ownership expense                                         --                --              (263)
                                                             ----------        -----------       ----------
Income from operations                                             742            37,689            34,408
Interest expense, net                                           (9,724)           (6,838)           (7,193)
Distribution on guaranteed
 preferred beneficial interests                                (12,232)          (12,232)           (3,058)
                                                             ----------        ----------        ----------
 Income(loss)from continuing operations
 Before Income Taxes and
 Extraordinary Loss                                          $ (21,214)        $  18,619         $  24,157
                                                             ==========        ===========       =========

                                                                            Year Ended December 31,
                                                             ---------------------------------------------
                                                                1998              1997              1996
                                                             ---------         ---------         ---------
Reconciliation of Segment Tangible
 Assets to Total Assets:
Segment tangible assets                                      $ 190,966         $ 202,769         $ 186,305
Goodwill                                                        51,642            54,997            50,791
Other intangible assets                                            762               960                16
Deferred income taxes                                           12,975            13,324            14,326
Cash value of life insurance                                    14,190            10,262             8,407
Assets held for sale                                            35,249            40,987            28,562
Other corporate assets                                          17,233             6,941             9,134
                                                             ---------         ---------         ---------
  Total assets                                               $ 323,017         $ 330,240         $ 297,541
                                                             =========         =========         =========
</TABLE>


                                       60

<PAGE>


                                  SUNSOURCE INC. AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                         (dollars in thousands, except per share amounts)



21.  Segment Information continued:

<TABLE>
<CAPTION>
<S>                                                            <C>                <C>               <C>
Reconciliation of Segment
 Capital Expenditures to
 Total Capital Expenditures:
Segment capital expenditures                                 $   4,572         $   6,032         $   4,430
Corporate capital expenditures                                     183               196               130
                                                             ---------         ---------         ---------
  Total capital expenditures                                 $   4,755         $   6,228         $   4,560
                                                             =========         =========         =========


Reconciliation of Segment Depreciation
 to Total Depreciation:
Segment depreciation                                         $   4,170         $   4,089         $   3,178
Corporate depreciation                                             102               103               101
                                                             ---------         ---------         ---------
  Total depreciation                                         $   4,272         $   4,192         $   3,279
                                                             =========         =========         =========
</TABLE>

22.  Sale Leaseback Transaction:

The Company sold certain real property of its Kar segment for $5,025 on
September 30, 1999 which were leased back from the same purchaser under two
separate lease agreements over periods of five and seven years, respectively.
The related leases are being accounted for as operating leases, and the
resulting gains aggregating $2,132 are being amortized over the respective lives
of the leases. As of December 31, 1999, the Company has outstanding $2,027 of
deferred gains relating to the sale leaseback transaction of which $372 is
included in other accrued expenses and $1,655 is included in other liabilities.
Both leases require the Company to pay customary operating and repair expenses
and to observe certain operating restrictions.

23. Subsequent Events:

On January 10, 2000, the Company signed a letter of intent to sell its Harding
Glass operation to a strategic purchaser. The transaction is expected to result
in the sale of Harding's assets for cash plus the assumption of certain
liabilities. SunSource recorded an expected loss on the sale of Harding in 1999
in the amount of $23,834 or $3.53 per common share. Sales from Harding were
$118,282 for the year ended December 31, 1999. The Company expects to consummate
the sale of Harding in the second quarter of 2000.

On March 2, 2000 the Company completed an agreement with a newly-formed
partnership affiliated with Glencoe Capital, L.L.C. ("Glencoe"). The Company
contributed the interests in its Kar Products, Inc. and A & H Bolt & Nut Company
Limited operations (collectively, the "Kar" business) and Glencoe contributed
cash equity to the new partnership, G-C Sun Holdings L.P. ("G-C"). The Company
received $105,000 in cash proceeds from the transaction though repayment of
assumed debt by G-C. Affiliates of Glencoe will hold a 51% controlling interest
with the remaining 49% interest held by SunSource. The Company will account for
its investment in the partnership in accordance with the equity method and
expects to record an after-tax gain on the transaction of approximately $51,000
in the first quarter of 2000.




                                       61

<PAGE>
                        SUNSOURCE INC. AND SUBSIDIARIES

                        Schedule II - Valuation Accounts

                             (dollars in thousands)

                                         Deducted From Assets in Balance Sheet
                                   ---------------------------------------------
                                                                    Accumulated
                                   Allowance for    Allowance for   Amortization
                                     Doubtful          Obsolete     of Goodwill
                                     Accounts        Inventories   and Tangibles
                                   -------------    -------------  -------------

Balance, December 31, 1996            1,810            3,228            15,787

 Additions charged to cost
  and expenses                        1,482            1,581             1,370

 Deductions                           1,456(A)         1,138(A)             --
                                     ------            -----           -------


Balance, December 31, 1997            1,836            3,671            17,157

 Additions charged to cost
  and expenses                        1,634            1,359             1,670

 Addition due to deferred
  recognition of tax benefit
   from Conversion                       --               --                --

 Deductions                           1,286(A)         1,584(A)             --
                                     ------            -----           -------


Balance, December 31, 1998            2,184            3,446            18,827

 Additions charged to cost
  and expenses                        1,494            4,982             1,847

 Addition due to the carryforward
  of capital losses                      --               --                --

 Deductions due to:
  Sale of division                      209              429               876
  Others                              1,197(A)         1,150(A)             --
                                     ------            -----           -------

Balance, December 31, 1999           $2,272           $6,849           $19,798
                                     ======           ======           =======


Notes:
(A) Includes write-off of accounts receivable (net of bad debt recoveries) and
    inventories.

                                       62

<PAGE>



Item 9 - Changes in and Disagreements on Accounting and
         Financial Disclosure.



         Not applicable.


                                       63

<PAGE>




                                    PART III




Item 10 - Directors and Executive Officers of the Registrant.


Information under the heading "Election of Directors" in the Proxy Statement for
the annual meeting of stockholders to be held May 11, 2000 (the "2000 Annual
Proxy Statement") is incorporated by reference herein.



Item 11 - Executive Compensation


Information under the heading "Executive Compensation" in the 2000 Annual Proxy
Statement is incorporated by reference herein.



Item 12 - Security Ownership of Certain Beneficial Owners and Management.


Information under the heading "Security Ownership of Certain Beneficial Owners
and Management" in the 2000 Annual Proxy Statement is incorporated by reference
herein.



Item 13 - Certain Relationships and Related Transactions.


Information under the heading "Certain Transactions" in the 2000 Annual Proxy
Statement is incorporated by reference herein.








                                       64

<PAGE>




                                     PART IV



Item 14 - Exhibits, Financial Statement Schedules, and Reports
          on Form 10-K.



          (a)  Documents Filed as a Part of the Report:

               1. Financial Statements.

               The information concerning financial statements called for by
Item 14 of Form 10-K is set forth in Part II, Item 8 of this annual report on
Form 10-K.


               2. Financial Statement Schedules.

               The information concerning financial statement schedules called
for by Item 14 of Form 10-K is set forth in Part II, Item 8 of this annual
report on Form 10-K.


               3. Exhibits, Including Those Incorporated by Reference.

               The following is a list of exhibits filed as part of this annual
report on Form 10-K. Where so indicated by footnote, exhibits which were
previously filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is indicated in
parentheses.


         Plan of Acquisition, Reorganization, Arrangement, Liquidation or
         Succession

         2.1      Contribution Agreement by and among SunSource Inc., SunSource
                  Industrial Services Company, Inc., KAR Products Inc., A & H
                  Holding Company, Inc., SunSource Canada Investment Company, A.
                  & H. Bolt & Nut Company Limited and GC-Sun Holdings, L.P.
                  dated as of February 10, 2000 (9) (Exhibit 2.1)

         2.2      Amendment No. 1 to Contribution Agreement by and among
                  SunSource Inc., SunSource Industrial Services Company, Inc.,
                  Kar Products LLC (as successor by merger to Kar Products,
                  Inc.), A&H Holding Company, Inc., SunSource Canada Investment
                  Company, A. & H. Bolt & Nut Company Limited and GC-Sun
                  Holdings, L.P. dated as of March 2, 2000. (9) (Exhibit 2.2)

       **2.3      Asset Purchase Agreement by and among Lawson Products,
                  Inc., ACS/SIMCO, Inc. and SunSource Inc. and certain
                  subsidiaries dated as of July 1, 1999.

       **2.4      Transitional Services and Supply Agreement dated as of
                  July 1, 1999.

         2.5      Agreement and Plan of Conversion dated as of July 31, 1997 (4)
                  (Exhibit 2.1)

                                       65

<PAGE>




         Articles of Incorporation and By-Laws

         3.1      Amended Bylaws of the Company dated as of September 24, 1998
                  (1) (Exhibit 3.1)

         3.2      Amended and Restated Certificate of Incorporation of the
                  Company (5) (Exhibit 3.1)

         3.3      Bylaws of the Company (5) (Exhibit 3.2)

         Instruments Defining the Rights of Security Holder Including Indentures

         4.1      Amended and Restated Declaration of Trust (5) (Exhibit 4.1)

         4.2      Indenture between the Company and the Bank of New York (5)
                  (Exhibit 4.2)

         4.3      Preferred Securities Guarantee (5) (Exhibit 4.3)

         4.4      Rights Agreement between the Company and the Registrar and
                  Transfer Company (5) (Exhibit 10.5)

         4.5      Amended and Restated Note Purchase Agreement dated December
                  31, 1998 between Teachers Insurance and Annuity Association
                  and SunSource Inc. and its Subsidiaries, Exhibit 10.2

         Material Contracts

     ** 10.1      1998 Equity Compensation Plan-Amendment to Nonqualified
                  Stock Option Grant dated as of January 26, 2000.

     ** 10.2      1998 Equity Compensation Plan - Restricted Stock Grant
                  dated as of January 26, 2000.

     ** 10.3      Note and Pledge Agreement between Maurice P. Andrien,
                  Jr., and SunSource Inc. dated as of February , 2000.

     ** 10.4      Revolving Credit, Term Loan, Guaranty and Security
                  Agreement between PNC, National Association (as lender and
                  agent) and SunSource Inc. and subsidiaries dated as of
                  December 15, 1999.

     ** 10.5      Employment Agreement between SunSource Inc. and Donald T.
                  Marshall dated as of April 28, 1999.

     ** 10.6      Employment Agreement between SunSource Inc. and SunSource
                  Corporate Group, Inc. and Maurice P. Andrien, Jr.

        10.7      Second Amended and Restated Credit Agreement dated December
                  31, 1998, among First Union National Bank, for itself and as
                  agent, The Bank of Nova Scotia, for itself and as
                  documentation agent, and SunSource Inc. and its Subsidiaries
                  (8) (Exhibit 10.1)


                                       66

<PAGE>



        10.8     *Deferred Compensation Plan for Key Employees of SDI Operating
                  Partners, L.P. (2) Exhibit 10.1

        10.9     *SunSource Inc. 1998 Equity Compensation Plan (3) Exhibit 10.1

       10.10     *SunSource Inc. Stock Compensation Plan for Non-Employee
                  Directors (3) Exhibit 10.2

       10.11     *Sun Distributors Incentive Compensation Plan. (6) (Exhibit
                  10.5)

       10.12     *Sun Distributors, Inc. Long-Term Performance Award Plan. (As
                  Amended June 1985) (6) (Exhibit 10.6)

       10.13     *SDI Operating Partners, L.P. Deferred Compensation Plan for
                  Division Presidents (As amended September 13, 1993). (7)
                  (Exhibit 10.7)

       10.14     *SDI Operating Partners, L.P. Long-Term Performance Share Plan
                  dated January 1, 1994. (7) (Exhibit 10.8)

       10.15     *Deferred Compensation Plan for Key Employees of SDI Operating
                  Partners, L.P. (2) (Exhibit 10.4)



                 Subsidiaries of the Registrant

      **21.1     Subsidiaries

                 Consent of Independent Accountants

      **23.1     Consent of PricewaterhouseCoopers LLP


                 Financial Data Schedules

      **27.1     Summary financial information as of and for the year ended
                 December 31, 1999.

           ------------------------

         (1)  Filed as an exhibit to Quarterly Report on Form 10-Q for the
              Quarter ended September 30, 1998.

         (2)  Filed as an exhibit to Registration Statement No. 333-63409 on
              Form S-8.

         (3)  Filed as an exhibit to Quarterly Report on Form 10-Q for the
              Quarter ended March 31, 1998.

         (4)  Filed as an exhibit to Registration Statement No. 333-19077 on
              Form S-4.

         (5)  Filed as an exhibit to Registration Statement No. 333-44733 on
              Form S-2.

         (6)  Filed on March 31, 1993, as an exhibit to Annual Report on Form
              10K for the year ended December 31, 1992.



                                       67

<PAGE>



         (7)  Filed on March 31, 1994, as an exhibit to Annual Report on Form
              10K for the year ended December 31, 1993.

         (8)  Filed on March 30, 1999 as an exhibit to Annual Report on Form 10K
              for the year ended December 31, 1998.

         (9)  Filed on March 17, 2000 as an exhibit to Current Report on Form
              8-K

              *  Management contract or compensatory plan or arrangement
                 required to be filed as an Exhibit pursuant to Item 14(c) of
                 this report.

              ** Filed herewith.


         (b)  Reports on Form 8-K.

              A Current Report on Form 8-K was filed on March 17, 2000 reporting
              a disposition under Item 2 of form 8-K (See exhibit 2.1 and 2.2
              hereto)




                                       68

<PAGE>







                                   SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                               SUNSOURCE INC.



Date:  March 28, 2000                           By:/s/ Maurice P. Andrien, Jr.
                                                ------------------------------
                                                       Maurice P. Andrien, Jr.
                                                Title: Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of l934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Each person in so signing also makes, constitutes and appoints Maurice P.
Andrien, Jr., and Joseph M. Corvino, and each of them, his true and lawful
attorney-in-fact, in his name, place and stead to execute and cause to be filed
with the Securities and Exchange Commission any or all amendments to this
report.

         Signature                     Capacity                       Date
         ---------                     --------                        ----




/s/ Maurice P. Andrien, Jr.     Principal Executive               March 28, 2000
-----------------------------   Officer and Director
Maurice P. Andrien, Jr.





/s/ Joseph M. Corvino           Principal Financial               March 28, 2000
-----------------------------   Officer
Joseph M. Corvino





/s/ Edward L. Tofani           Principal Accounting               March 28, 2000
-----------------------------  Officer
Edward L. Tofani






/s/ O. Gordon Brewer, Jr.       Director                          March 28, 2000
-----------------------------
O. Gordon Brewer, Jr.


                                       69

<PAGE>







/s/ Norman V. Edmonson          Director                          March 28, 2000
------------------------------
Norman V. Edmonson




/s/ Arnold S. Hoffman           Director                          March 28, 2000
------------------------------
Arnold S. Hoffman




/s/ Robert E. Keith, Jr.        Director                          March 28, 2000
------------------------------
Robert E. Keith, Jr.




/s/ Donald T. Marshall          Director                          March 28, 2000
------------------------------
Donald T. Marshall




/s/ John P. McDonnell           Director                          March 28, 2000
------------------------------
John P. McDonnell




/s/ Donald A. Scott             Director                          March 28, 2000
------------------------------
Donald A. Scott




/s/ Geoffrey C. Shepard         Director                          March 28, 2000
------------------------------
Geoffrey C. Shepard




/s/ Francis G. Ziegler          Director                          March 28, 2000
-----------------------------
Francis G. Ziegler





                                       70